Deloitte, Ernst & Young apparently botched Caterpillar's China due diligence

Deloitte Touche and Ernst & Young were two of the accounting companies that conducted due diligence for Caterpillar’s (NYSE:CAT) $886 million purchase of ERA, the Chinese mining equipment maker that was later alleged to have accounting irregularities, reports FT.com (subs. required).

According to the newspaper, Deloitte was in charge of auditing the working capital for ERA, while Ernst & Young conducted overall evaluation of the transaction.

Caterpillar – the world's largest heavy equipment manufacturer – said last week it would pay a $580 million penalty related to accounting fraud at the recently bought Chinese company.

The machinery giant will write down 87 cents a share in the fourth quarter – almost 10% of its expected 2012 earnings of $9.10 a share. The company also announced it was getting rid of the senior management of Siwei, a division of ERA Mining Machinery, which Illinois-based Caterpillar acquired in June last year for $650 million.

ERA’s case is nothing new. In the last two years fraud allegations have swept over several China-based firms listed overseas. Last month, the US Securities and Exchange Commission (SEC) charged the Chinese affiliates of five leading accounting firms with violating securities law for refusing to disclose document related to nine companies whose securities are publicly traded in the US.

According to Bloomberg, the auditors claimed Chinese law prevented them from agreeing to the SEC’s demands, obstructing U.S. efforts to probe allegations of fraud that have wiped 61%t from a gauge of Chinese and Hong Kong stocks traded in the States since 2011.

Asked about their involvement in the ERA-Caterpillar deal, Deloitte only said it “was not involved in any due diligence pertaining to working capital,” while Ernst & Young declined to comment on or confirm its participation.

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