The accounting firm of Deloitte & Touche will pay $50 million to federal regulators to resolve civil and administrative proceedings against it, the firm announced yesterday. The civil charges brought against the firm were a result of its work at Adelphia Communications, the cable operator that Deloitte audited.
The firm will pay $25 million to resolve a civil lawsuit filed by the Securities and Exchange Commission yesterday and another $25 million administrative penalty - the largest fine ever paid by an accounting firm. Both payments will be deposited into a fund to compensate Adelphia investors.
The settlement came a day after an agreement by the Rigas family, which runs Adelphia, to relinquish about $1.5 billion in assets, including $715 million for a fund to make restitution to Adelphia investors.
In its complaint, the SEC contended that Deloitte, the third-largest accounting firm by revenue and the American member of the international accounting group Deloitte Touche Tohmatsu, had failed to use procedures that would have detected significant misstatements in Adelphia's 2000 annual report.
According to the SEC's complaint, "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."
James Quigley, chief executive of Deloitte, said in a statement yesterday: "These cases raise a larger issue facing the auditing profession. Among our most significant challenges is the early detection of fraud, particularly when the client, its management and others collude specifically to deceive a company's auditors."
According to the statement, Deloitte will put into effect changes to its auditing practices and procedures, including "more tailored audit procedures in response to identified risks and improved documentation of the conclusions regarding the issues raised; the completion of specialized training for all audit professionals in detecting potential fraud; and deploying forensic specialists to assist audit teams" for certain clients, Quigley said.
Specifically, according to the SEC's administrative order, Deloitte will adopt a process for analysis of potentially risky aspects of an audit and a proposal for ensuring the audit's accuracy. The order also requires Deloitte to hire an independent consultant in 18 months to analyze the firm's compliance with the order's terms.
Mark K. Schonfeld, director of the northeast regional office of the SEC, said that the auditor did more than miss obvious signs of potential fraud, though. "Deloitte was not deceived in this case," he said. "The findings in the order show that the relevant information was right in front of their eyes. Deloitte just didn't do its job, plain and simple. They didn't just miss red flags, they pulled a flag over their head and then claimed they couldn't see."
Deloitte also settled an SEC administrative proceeding brought against the firm for its 1998 audit of Just For Feet, a Birmingham, Ala., shoe and sports apparel retailer that no longer exists. The accounting firm will pay $375,000 to the government to settle that action. Deloitte agreed to the two settlements without admitting or denying wrongdoing.