Sunday, July 10, 2005

SEC Lets the Cat Out of the Bag About PCAOB Investigation of Deloitte & Touche

The Public Company Accounting Oversight Board (PCAOB) has launched an investigation of Big Four audit firm Deloitte & Touche in connection with the 2003 audit of Navistar International.  Unfortunately for all involved, PCAOB investigations are supposed to remain confidential, but apparently the SEC accidentally disclosed the information by placing the investigation order in its public document room where, not surprisingly, it got noticed.  The PCAOB was created by the Sarbanes-Oxley Act to undertake the oversight function of accounting firms, a job previously left to the SEC alone.  The Board issued an investigative order in May, and according to a Bloomberg story (here), around June 20 the SEC placed the document in its public reference room for all to see.  While most SEC filings are available on-line through EDGAR, there is still a thriving business in the public reference room for looking up documents, and this one somehow got out. 

In January, Navistar announced that it could not file its annual report due to accounting problems, and a Jan. 31 8-K filed by the company stated:

As previously disclosed in Navistar International Corporation’s (the company) Report on Form 8-K dated January 7, 2005 and Form 12b-25 (Notification of Late Filing) dated January 14, 2005, the company was unable to timely file its Report on Form 10-K for the period ended October 31, 2004 due to the ongoing analysis of the application of certain accounting standards relating to the securitization of assets at the company’s finance subsidiary, Navistar Financial Corporation (NFC). Following the completion of this analysis, and after discussions with the company’s audit committee and independent registered public accounting firm, Deloitte & Touche, LLP on this subject, the company concluded on January 28, 2005 that a restatement of its financial statements for fiscal years 2002 and 2003 and the first three quarters of fiscal 2004 is required. As such, those financial statements and any related auditor reports should no longer be relied upon because of errors in such financial statements.

The PCAOB investigation appears to be related to the Navistar restatement, and the order states that Deloitte may have violated as many as five auditing standards.  If PCAOB takes any disciplinary action against Deloitte, it will be the first by the Board against a Big Four firm since it came into existence. (ph)

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