December 5, 2016

U.S. audit regulator PCAOB says penalty is regulator’s largest ever

The Brazil affiliate of accounting firm Deloitte Touche Tohmatsu agreed Monday to pay $8 million to settle a U.S. regulator’s allegations it issued false audit reports and tried to cover it up.

The fine for Deloitte Touche Tohmatsu Auditores Independentes, Deloitte’s Brazilian member firm, is the largest ever imposed by the Public Company Accounting Oversight Board, the U.S. audit-industry regulator. Twelve former Deloitte Brazil partners and other personnel were sanctioned as well in the case, which was announced Monday by the PCAOB.

In one instance, one of the Deloitte auditors told another that “everything we discussed, never happened,” according to the PCAOB.

In settling, Deloitte Brazil admitted it violated quality control standards and failed to cooperate with the PCAOB’s inspection and investigation. That is the first such admission by an affiliate of a Big Four accounting firm.

The PCAOB insisted on the admissions because “it demonstrates the seriousness, the egregiousness of what happened here,” said Claudius Modesti, the PCAOB’s enforcement and investigations director. The 12 employees settled without admitting or denying wrongdoing.

Separately, Deloitte’s Mexico affiliate agreed Monday to pay $750,000 to settle PCAOB allegations it hadn’t taken proper steps in documenting its audits.

The two cases spotlight the challenges involved in supervising companies and auditors in emerging-market countries that may not have the same business norms and standards of financial reporting as more-developed markets. The PCAOB, which oversees non-U.S. audit firms if they audit U.S.-traded companies, has “experienced a significant increase” in enforcement cases involving foreign audit firms, PCAOB Chairman James Doty said in a speech Monday at an accounting conference in Washington.

Audit firms like Deloitte have “a key gatekeeper role” to protect U.S. investors, and “we have a responsibility to hold accountable those who don’t play by the rules,” said the PCAOB’s Mr. Modesti. If auditors want to do business in emerging markets, they “have to take on the responsibilities too.”

Deloitte Brazil said in a statement that “unethical behavior is not tolerated in our firm,” and that the conduct of the individuals involved was “wholly incompatible with our culture.” The firm is now under new leadership, and “we have full confidence in the quality of our audits,” the firm said.

Deloitte’s global network said the conduct of those responsible was “wholly unacceptable.” The Deloitte member firms have worked with regulators to resolve the issues, and Deloitte said it has “enhanced our global focus” on compliance and quality control measures.

A spokeswoman for Deloitte Mexico declined to comment.

The two affiliates are legally separate from Deloitte’s U.S. firm; Deloitte and other major accounting firms are structured as international partnerships with free-standing member firms in each country in which they do business.

According to the PCAOB, Deloitte Brazil’s 2010 audit of Brazilian airline Gol Linhas Aereas Inteligentes SA was deficient in several ways—the auditor failed to obtain sufficient evidence the airline was accurately accounting for its maintenance deposits, for instance. But Deloitte Brazil gave the company a clean bill of health nonetheless.

The firm later altered dozens of documents to conceal the audit deficiencies when the PCAOB scrutinized the Gol Linhas audit as part of a regular inspection of Deloitte Brazil’s work, the board said. Deloitte Brazil personnel also lied to the PCAOB after it launched an investigation of the audit, the PCAOB said.

In a March 2014 conversation cited in the PCAOB’s documents, a Deloitte Brazil senior partner told a senior manager to remove documents from his computer and his office to prevent them from being given to the PCAOB as it was conducting its investigation. The senior partner wasn’t aware the senior manager was recording the conversation, the PCAOB said.

“Any evidence that you have of this…keep it somewhere else, but not in your machine, not in the office. OK?” the senior partner said. Since the partner in charge of the airline’s audit had agreed to assume responsibility for the problems if they were discovered to protect other members of the firm’s leadership, “everything you told me, everything we discussed, never happened,” the senior partner said.

Gol Linhas isn’t charged with any wrongdoing. The company said in a statement that there is no indication of any benefit to it or any impact on its financial statements from Deloitte Brazil’s alleged actions.

The 12 former Deloitte Brazil employees who the PCAOB sanctioned include the firm’s former audit practice leader and former national professional practice director. Most of them have been suspended or barred from working for firms that audit U.S. public companies.

In addition to the fine, Deloitte Brazil also agreed to other sanctions including appointment of an independent monitor and a ban on accepting certain new audit work until the monitor confirms the firm has made progress in remedying its problems.

In the Mexico case, the PCAOB said, Galaz Yamasaki Ruiz Urquiza S.C., Deloitte’s Mexican firm, was repeatedly late in archiving its documentation of audits, increasing the risk that audit work papers might be improperly altered. Three former Deloitte Mexico auditors improperly altered work papers on an audit of mining company Southern Copper Co. and were also sanctioned, the PCAOB said. Both the firm and the three former auditors settled without admitting or denying wrongdoing.

Southern Copper isn’t charged with any wrongdoing. The company couldn’t immediately be reached for comment.

[The Wall Street Journal]