Deloitte & Touche

Accounting Failures and SEC Enforcement Cases

Adelphia

April 26, 2005: The Wall Street Journal reported that Deloitte & Touche will pay a $50 million fine to settle SEC civil charges that it failed to prevent massive accounting fraud at Adelphia Communications Corp. -- the largest penalty ever levied against an accounting firm by the SEC. 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 mount the Rigases had borrowed. (“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, without forcing the firm to admit or deny the findings. Two Deloitte partners – Steven H. Barry and Karen T. Baker were barred from practicing for two years and a year, respectively.

Parmalat

Deloitte was the giant Italian dairy company's auditor when Italy's biggest accounting fraud – ultimately estimated at $16 billion (check) and lasting for over a decade – was revealed. Two partners in the firm's Italian office – Adolfo Mamoli and Giuseppe Rovelli, were targeted by Italian investigators in the case, along with nearly two dozen top Parmalat executives, as well as auditors from Grant Thornton's Italian branch (Parmalat's chief auditor until 1999), which was expelled from the firm as a result. (Tom Rachman, “List of Suspects Grows in Probe of Parmalat,” Washington Post January 9, 2004)

The Parmalat case was also a litmus test of the Big Four firms' contention that when it comes to auditing global companies, an accounting firm's national offices are still separate entities, according to the Wall St. Journal. The journal reported that a partner in the firm's Italian office noted “we are now an integrated firm worldwide” when urging his colleagues in the firm's New Jersey office by email to go easy on fees for an upcoming Audit of the U.S. unit of Parmalat SpA, the Italian dairy multinational, 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. Deloitte & Touche SpA, the Italian arm, issued assurances that U.S. investors relied upon before a multi-billion dollar fraud was revealed. Parmalat filed for bankruptcy in 2003, after the “giant Ponzi scheme” involving billions of dollars borrowed from investors around the world, was revealed. Deloitte argued in the Southern Distrcit 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 branch office in Brazil was communicated to James Copeland, then head of Deloitte's international organization and CEO of the firms U.S. arm. The attorney for investors suing the firm claimed that control of the member firms rested with Copeland and the international organization, while attorneys for Copeland and Deloitte denied it.

Enron

A Senate Joint Committee on Taxation investigation found that accountants from Deloitte & Touche were paid millions of dollars to advise Enron how to avoid hundreds of millions of dollars in taxes using complex structured finance vehicles. (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, was 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). After Sarbanes-Oxley, the firm announced it would spin off its consulting division by late 2002 to comply with new restrictions on certain non-auditing services, but in April 2003, the spin-off was canceled. The firm explained that it was shifting its consulting work to non-audit clients.

Fortress Re

November 20, 2004: The Economist reported 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 restated past results. (“Deloitte's Audit of Navistar is Target of U.S. Regulatory Order,” Bloomberg, July 13, 2005)