Sunday, October 2, 2005

SEC Institutes Administrative Proceedings Against Two Deloitte Accountants

The SEC instituted administrative proceedings under Rule 102(e) against two Deloitte & Touche accountants related to their work on the audit of Adelphia Communcations involving the failure to properly account for transactions involving the Rigas family, which controlled Adelphia.  Adelphia eventually collapsed amid a widespread accounting fraud that included a number of transactions with the controlling shareholders that were not properly disclosed.  The engagement partner, Gregory Dearlove, is fighting the Commission's charges (Order here), which allege the following:

Adelphia’s 2000 Financial Statements were materially false and misleading and failed to comply with Generally Accepted Accounting Principles ("GAAP"). In its Form 10-K for the year-ended December 31, 2000 (the "2000 Form 10-K"), Adelphia understated its coborrowing debt by $1.6 billion, overstated equity by at least $368 million and improperly netted and failed to disclose related party receivables and payables between Adelphia and entities owned or controlled by members of Adelphia’s controlling shareholders, the Rigases. Adelphia also failed to disclose the nature and extent of material related party transactions between Adelphia and the Rigases and the entities owned or controlled by them.

Dearlove knew or should have known that Adelphia’s 2000 Financial Statements had not been prepared in conformity with GAAP and that the audit he planned, directed and supervised of the 2000 Financial Statements (the "2000 Audit") had not been conducted in accordance with Generally Accepted Auditing Standards ("GAAS"). Dearlove nonetheless signed an audit report containing an unqualified opinion on the 2000 Financial Statements, stating falsely that the audit was conducted in accordance with GAAS, that the financial statements were prepared in conformity with GAAP, and that they fairly presented Adelphia’s financial condition.

Another Deloitte accountant, William Caswell, who served as a non-partner director of the Adelphia audit, settled the SEC administrative proceeding by agreeing to a two-year bar on appearing before the Commission (Order here). (ph)

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