It’s Not a Secret Anymore! People's Republic of China Company and Audit Firm Collide

Abstract

This case is fictitious but draws upon facts from actual occurrences. It requires students to apply auditing concepts and professional standards in an international setting. An affiliate of a U.S. accounting firm, Loxon Shanghai CPA Ltd., has received a request from the SEC for the audit workpapers of one of their Chinese clients, Great Lead Software. If Loxon complies with the SEC, it may violate Chinese State Secrecy Laws. After revelations of fraud by Great Lead Software surface, Loxon’s decision regarding the workpapers becomes more perilous. The case provides an opportunity for students to achieve multiple learning objectives, including identify audit deficiencies in a globalized setting, identify auditor’s responsibility in the United States versus China, describe the benefits of International Standards on Auditing, describe how culture may affect financial reporting systems including transparency and regulatory issues, and identify potential conflicts between U.S. regulatory requirements and the Chinese state secrets laws.