US auditing watchdog fines Deloitte a record $8m
Group’s Brazilian arm falsified reports and gave false testimony, says PCAOB
The US auditing watchdog has fined Deloitte’s Brazilian arm a
record $8m for falsifying audit reports, altering documents and
providing false testimony during an investigation that unearthed what it
described as its “most serious” finding of misconduct.
The Public Company Accounting Oversight Board also sanctioned 12 former partners, including a national practice director, and auditors of the Brazil-based Deloitte Touche Tohmatsu Auditores Independentes.
The Deloitte Brazil case is the first time the PCAOB has charged a member of the Big Four auditing firms with fraud and for failing to co-operate with an investigation. In settling, Deloitte Brazil admitted it had violated quality control standards and failed to co-operate with the auditing board’s inspection and subsequent investigation.
“This is the most serious misconduct we’ve uncovered. It’s cover-up after cover-up after cover-up,” Claudius Modesti, director of enforcement at the PCAOB, said. “As an investor you’re expecting that the audit was done properly and sufficiently and that wasn’t the case here.”
In addition to the fine, which is the largest that the PCAOB has ever obtained, Deloitte agreed to an independent monitor and is banned from accepting new audit clients in Brazil until the firm meets remedial benchmarks.
In a separate case, the PCAOB fined Deloitte Mexico $750,000 for altering documents in a different audit.
Deloitte said: “Integrity in delivering high-quality services is critical to our business, our clients and the public interest; it is non-negotiable.” It added that the actions of “a limited number” of individuals was “wholly unacceptable”.
The PCAOB alleges Deloitte knew that its client, low-cost airline Gol Linhas Aéreas Inteligentes, did not have enough evidence to support “a potentially material amount of the maintenance deposits” that it was reporting. Deloitte’s senior auditors also knew the books were being reviewed for potential material misstatements when it released its audit report and signed off on the accuracy of the financial statements.
The auditing watchdog later opened an investigation and alleges that this was further obstructed by the Deloitte auditors who provided the altered work papers to regulators. Senior Deloitte auditors falsely testified under oath that the altered work papers were the original documents, according to the settlement.
Investigators compared documents and realised something had changed. “The documentation that they had generated during the audit had changed so that our inspectors wouldn’t be able to identify, for example, the significance of these maintenance deposit deficiencies,” said Mr Modesti.
Deloitte conducted its own internal investigation after regulators brought concerns about altered documents and found 70 altered work papers related to the Gol audits. PCAOB said senior leaders of the firm also obstructed investigators when they sought to look into the second client.
In January, a senior manager who worked on the Gol audit gave PCAOB investigators recordings taken on his mobile phone of conversations he had had with a senior partner. In one of those recordings, made in 2014 amid the enforcement investigation, the senior partner told the manager, “any evidence that you have of this, remove it from your machine. Keep it in a — if you have that, keep it somewhere else, but not in your machine, not in the office. OK?”
“Everything you told me, everything we discussed, never happened,” the senior partner added.
“This is kind of frightening,” said Erik Gordon, an assistant professor at the University of Michigan’s Ross School of Business. He said the presumption from Big Four accounting firms was that investors could trust them when investing in far-flung locations. The findings in Brazil and Mexico, he said, will give investors pause.
“If I were the managing partner of Deloitte, I would be thinking, we just made ‘x’ million dollars in fees from folks in Brazil and Mexico and we just lost $1bn in brand name value.”
All but one of the former partners and auditors have been banned from working for companies and broker dealers that fall under the PCAOB’s oversight. One of those partners has been barred permanently, while others face bans ranging from one year to five years.
In the history of the PCAOB only three auditors have been reinstated after a bar.
The Public Company Accounting Oversight Board also sanctioned 12 former partners, including a national practice director, and auditors of the Brazil-based Deloitte Touche Tohmatsu Auditores Independentes.
The Deloitte Brazil case is the first time the PCAOB has charged a member of the Big Four auditing firms with fraud and for failing to co-operate with an investigation. In settling, Deloitte Brazil admitted it had violated quality control standards and failed to co-operate with the auditing board’s inspection and subsequent investigation.
“This is the most serious misconduct we’ve uncovered. It’s cover-up after cover-up after cover-up,” Claudius Modesti, director of enforcement at the PCAOB, said. “As an investor you’re expecting that the audit was done properly and sufficiently and that wasn’t the case here.”
In addition to the fine, which is the largest that the PCAOB has ever obtained, Deloitte agreed to an independent monitor and is banned from accepting new audit clients in Brazil until the firm meets remedial benchmarks.
In a separate case, the PCAOB fined Deloitte Mexico $750,000 for altering documents in a different audit.
Deloitte said: “Integrity in delivering high-quality services is critical to our business, our clients and the public interest; it is non-negotiable.” It added that the actions of “a limited number” of individuals was “wholly unacceptable”.
The PCAOB alleges Deloitte knew that its client, low-cost airline Gol Linhas Aéreas Inteligentes, did not have enough evidence to support “a potentially material amount of the maintenance deposits” that it was reporting. Deloitte’s senior auditors also knew the books were being reviewed for potential material misstatements when it released its audit report and signed off on the accuracy of the financial statements.
In 2012, PCAOB inspectors looked at the Gol audits during their review of Deloitte Brazil. The engagement partner for the Gol account allegedly instructed his team to alter the work papers, according to the settlement. The partner also told his staff to alter the work papers for another client whose audit was also under review, the PCAOB alleged.This is the most serious misconduct we’ve uncovered. Its cover up after cover up after cover up
The auditing watchdog later opened an investigation and alleges that this was further obstructed by the Deloitte auditors who provided the altered work papers to regulators. Senior Deloitte auditors falsely testified under oath that the altered work papers were the original documents, according to the settlement.
Investigators compared documents and realised something had changed. “The documentation that they had generated during the audit had changed so that our inspectors wouldn’t be able to identify, for example, the significance of these maintenance deposit deficiencies,” said Mr Modesti.
Deloitte conducted its own internal investigation after regulators brought concerns about altered documents and found 70 altered work papers related to the Gol audits. PCAOB said senior leaders of the firm also obstructed investigators when they sought to look into the second client.
In January, a senior manager who worked on the Gol audit gave PCAOB investigators recordings taken on his mobile phone of conversations he had had with a senior partner. In one of those recordings, made in 2014 amid the enforcement investigation, the senior partner told the manager, “any evidence that you have of this, remove it from your machine. Keep it in a — if you have that, keep it somewhere else, but not in your machine, not in the office. OK?”
“Everything you told me, everything we discussed, never happened,” the senior partner added.
“This is kind of frightening,” said Erik Gordon, an assistant professor at the University of Michigan’s Ross School of Business. He said the presumption from Big Four accounting firms was that investors could trust them when investing in far-flung locations. The findings in Brazil and Mexico, he said, will give investors pause.
“If I were the managing partner of Deloitte, I would be thinking, we just made ‘x’ million dollars in fees from folks in Brazil and Mexico and we just lost $1bn in brand name value.”
All but one of the former partners and auditors have been banned from working for companies and broker dealers that fall under the PCAOB’s oversight. One of those partners has been barred permanently, while others face bans ranging from one year to five years.
In the history of the PCAOB only three auditors have been reinstated after a bar.
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