Tuesday, April 26, 2005

Deloitte & Touche Settle Two SEC Cases Involving Improper Audits

Deloitte & Touche settled two SEC investigations by agreeing to settlements related to the firm's audits of Adelphia Communications and Just for Feet, Inc.  The Adelphia case is the far larger one in which Deloitte agreed to pay $50 million into a settlement fund for Adelphia investors related to its audits of the company before its collapse into bankruptcy in 2002.  The SEC Litigation Release (here) describes the problems in the audit:

The Commission's complaint against Deloitte alleges that, during Deloitte's audit of Adelphia's financial statements for the year ended December 31, 2000, Deloitte failed to implement audit procedures designed to detect the illegal acts at Adelphia and failed to implement audit procedures designed to identify material related party transactions or related party transactions otherwise requiring disclosure. Among other things, Adelphia understated its subsidiary debt by $1.6 billion, overstated equity by at least $368 million, improperly netted related party receivables and payables between Adelphia and related parties, and failed to disclose the extent of related party transactions.

The SEC Complaint and related administrative action under Section 102(e) are here and here.

The Just for Feet proceeding involved Deloitte's failures related to its 1998 audit of the company, as described in the SEC's administrative complaint here:

Just for Feet’s 1998 financial statements included in its annual report for fiscal 1998 on Form 10-K, filed with the Commission on April 30, 1999, were materially false and misleading, overstated net income and net assets, and failed to comply with generally accepted accounting principles ("GAAP"). Just for Feet falsified its financial statements by (1) improperly recognizing unearned and fictitious receivables and revenue from its vendors, (2) failing to properly account for and to disclose problems with obsolete inventory, and (3) improperly recording as income the value of display booths provided by its vendors.

Deloitte agreed to pay a $375,000 civil penalty related to the audit, and two audit partners were barred from practicing before the Commission, with the right to reapply in one and two years.

This is the second administrative action against a Big Four firm in the past week, with KPMG settling with the SEC regarding its audit work for Xerox that involved disgorgement and a civil penalty totaling over $22 million (earlier post here). (ph)

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