The securities regulator is considering punishing Deloitte Touche Tohmatsu International for its audit work on Guangdong Kelon Electrical.

A spokesman at the China Securities Regulatory Commission (CSRC), who declined to be named, said Monday a hearing had been held April 7 to give Deloitte a chance to defend its audit work on Kelon, but the final decision was still pending.

A spokesman for Deloitte in Hong Kong declined to comment on the issue. He asked not to be named.

The CSRC spokesman said he wasn't sure what punishment Deloitte may face.

Deloitte was Kelon's auditor between 2002 and 2004. It signed off on Kelon's annual report for 2003 without any qualifications, but issued qualified opinions on the 2002 and 2004 annual reports.

In the company's 2004 annual report, Deloitte said it hadn't obtained all the information and explanations that it considered necessary for the purpose of audit and was unable to determine if Kelon had kept proper books. It also informed Kelon last year it wouldn't seek reappointment as its auditor.

Kelon's share price slumped last year after the CSRC said in August the company had inflated its sales and profit figures.

In September, former Kelon chairman Gu Chujun was arrested on charges of embezzlement, one month after he was sacked from his post.

In January, Kelon said it was considering legal action against Gu after an outside audit had uncovered suspicious flows of money between Kelon and companies under his control.

Some 30 lawyers from 22 law firms across China last week formed a group to offer legal services to Kelon's shareholders who had bought Kelon shares after reading Deloitte's audit opinion and Kelon's annual report, and had incurred losses.

Domestic newspaper reports said the shareholders would be entitled to sue Deloitte if the securities regulator took action against the firm.

Last week, a court in Shanghai rejected a petition from a small shareholder in Kelon, who demanded a public apology and 495 yuan (US$62) as compensation from Deloitte for issuing an unqualified audit opinion on Kelon's 2003 financial statement. 

Editor: Yan