Deloitte & Touche

Accounting Failures and SEC Enforcement Cases

Adelphia

April 26, 2005: The Wall Street Journal reported that Deloitte & Touche would pay a $50 million fine to settle SEC civil charges that it failed to prevent massive accounting fraud at Adelphia Communications Corp. It was the largest penalty the SEC had ever levied against an accounting firm. Deloitte stopped auditing Adelphia in 2002. (Diya Gullapalli, “Deloitte to Be Latest to Settle In Accounting Scandals,” WSJ, 4/26/2006, A3)

Adelphia's former Vice President of Finance James Brown said he was able to convince Deloitte's auditor to not disclose the total amount borrowed by the Rigas family, which controlled Adelphia. (“Former Executive: Adelphia Auditor Caved under Pressure,” Technology Daily, May 7, 2004).

April 26, 2005: The SEC censures Deloitte and fines the firm $375,000 to settle charges based on its failed audit of Just for Feet, Inc.'s FY 1998 financial statements. The SEC did not force the firm to admit or deny the findings, but barred two Deloitte partners, Steven H. Barry and Karen T. Baker, from practicing for two years and one year, respectively.

Parmalat

Deloitte was auditor for the giant Italian dairy company when Italy's biggest accounting fraud – ultimately estimated at more than 14 billion euros and lasting for over a decade – was revealed. Italian investigators in the case targeted two partners in Deloitte's Italian office, Adolfo Mamoli and Giuseppe Rovelli, along with nearly two dozen top Parmalat executives, as well as auditors from Grant Thornton's Italian branch. Grant Thornton, Parmalat's chief auditor until 1999, expelled its Italian branch as a result of the scandal, and it was then that Deloitte took over the task. (Tom Rachman, “List of Suspects Grows in Probe of Parmalat,” Washington Post January 9, 2004)

The Parmalat case was also a litmus test, according to the Wall St. Journal, of the Big Four firms' contention that when auditing global companies, an accounting firm's national offices remain separate entities. The WSJ reported that a partner in Deloitte's Italian office emailed colleagues in New Jersey to go easy on fees for an upcoming audit of the U.S. unit of Parmalat SpA, the Italian dairy multinational. “We are now an integrated firm worldwide,” wrote the Italian Deloitte partner. According to the journal, “Parmalat's audit relied on work from Deloitte units in at least 30 countries," while the firm's Italian office used the firm's global reach to present itself as capable of handling the finances of complex multinational organizations. Before the multibillion dollar fraud was revealed, U.S. investors relied on assurances by Deloitte & Touche SpA, the firm's Italian arm. In 2003, after revelations that Parmalat's dealings amounted to a “giant Ponzi scheme,” Parmalat filed for bankruptcy. Deloitte argued in the Southern District Court of New York that the idea that there is one, single firm is flawed. (David Reilly and Alessandra Galloni, “Facing Lawsuits, Parmalat Auditor Stresses Its Disunity,” Wall St. Journal, April 28, 2005)

According to the WSJ, a dispute between Deloitte's Italian office and a Brazilian branch office was communicated to James Copeland, then head of Deloitte's international organization and CEO of the firm's U.S. arm. The attorney for investors suing the firm claimed that Copeland controlled the member firms and the international organization; attorneys for Copeland and Deloitte disagreed.

Enron

A Senate Joint Committee on Taxation investigation found that Enron paid Deloitte & Touche accountants millions of dollars for advise on how to use complex structured finance vehicles to avoid hundreds of millions of dollars in taxes. (Joshua Chaffin, Enron avoided hundreds of millions in tax: Banks, accountants and lawyers aided energy company says Congress report,” Financial Times, February 14, 2003).

Deloitte's managing partner, James Copeland, is a “strong opponent of wholesale change in the accounting industry, arguing against efforts to split the accounting and consulting functions.” (Los Angeles Times, 2/17/2007). Soon after the U.S. Congress passed the Sarbanes-Oxley Act in 2002 to reform business practices, Deloitte announced it would spin off its consulting division to comply with new restrictions on certain non-auditing services. In April 2003, the firm canceled the spin-off because it was shifting its consulting work to non-audit clients.

Fortress Re

November 20, 2004: The Economist reports that Deloittee & Touch faced a lawsuit of up to $2 billion for its audit of Fortress Re, a re-insurance firm that allegedly used certain insurance products to inflate profits. (“Half Measures; Auditing,” The Economist, November 20, 2004)

Navistar

May, 2005: The Public Company Accounting Oversight Board issues a two-page order concluding that Deloitte's work at Navistar may have failed to comply with at least five auditing standards. The order is mistakenly misdirected to a public file. As a result of a routine PCAOB audit inspection, eight Deloitte audit clients revised past results. (“Deloitte's Audit of Navistar is Target of U.S. Regulatory Order,” Bloomberg, July 13, 2005)