Audit Board Finds Flaws in Deloitte’s Work, but Also Improvement

Audit Board Finds Flaws in Deloitte’s Work, but Also Improvement

The regulator of accounting firms in the United States said on Friday that Deloitte & Touche, for the second consecutive year, had failed to correct deficiencies in its audit procedures to its satisfaction.

The Public Company Accounting Oversight Board said that in 2009 it told Deloitte that evidence from the board’s inspection of a number of the firm’s audits suggested “that important issues may exist” regarding “the sufficiency of the firm’s emphasis on the critical need to exercise due care and professional skepticism when performing audits.” It pointed to instances where the firm had failed to do enough work to check things that management told it.

In the year after that, the board said, the firm did not fix the problems to its satisfaction.

But, in an indication that Deloitte has since improved, the board allowed Deloitte to say that criticism in its two subsequent annual reviews, in 2010 and 2011, had been acted upon satisfactorily.

“We believe the P.C.A.O.B.’s determinations concerning our remediation of the quality control criticisms” in the 2009 and 2010 inspection reports “are reflective of the significant progress we have made toward the achievement of our audit quality objectives in more recent years,” Joe Echevarria, the chief executive of Deloitte, and Greg Weaver, the head of the firm’s audit business, said in a statement.

They cited the fact that the most recent board review found problems with fewer audits as evidence that “we are experiencing a positive trajectory.”

The tone of that statement was in sharp contrast to the one the firm issued in 2009, when the first part of the report was released. Then, in a statement signed by the firm but not by any individual, it challenged the board’s conclusions on a number of audits, saying Deloitte auditors “made and documented well-reasoned and supported judgments during the audit.”

“In our view,” the firm said at the time, “such reasonable judgments should be inspected and not second-guessed.”

Under the Sarbanes Oxley Act that established the board in 2002, it inspects top firms each year and releases a report discussing any deficiencies in the audits it reviewed. But a second part of the report, concerning broader deficiencies at the firms, is kept secret unless the firm fails to correct the problems within 12 months.

In 2011, Deloitte became the first large firm to suffer such a rebuke. Since then, PricewaterhouseCoopers and Ernst & Young also had secret reports released. Of the Big Four, only KPMG has so far not had such a report released.

In another announcement, the board said it had revoked the registrations of two small auditing firms and permanently barred the men running them from associating with a registered audit firm after concluding they violated laws against securities fraud by issuing audit opinions not supported by any work the firms did.

Cited were Harris F. Rattray C.P.A. of Miramar, Fla., and its owner with the same name, and Hood & Associates C.P.A.’s, of Tulsa, Okla., and its sole audit partner, Rick C. Freeman.

A third firm, Acquavella, Chiarelli, Shuster, Berkower & Company of New York, also had its registration revoked, but was told it could reapply in two years. An auditor for that firm, David T. Svoboda, was also barred, but told he could reapply in three years. They were not charged with fraud.

One of the firms Mr. Svoboda audited, Universal Travel, a company with operations in China, was subsequently charged with fraud by the Securities and Exchange Commission, which said it had hidden the way money was siphoned from the company after it sold stock in the United States. Mr. Svoboda was said to have not done enough work to check on the company’s cash balances, among other things.

Caribbean Pacific Marketing, a company audited by Mr. Rattray, had its S.E.C. registration revoked on the grounds it had concealed the fact it was controlled by a man who had been barred by a court from acting as an officer or director of any public company.

“Across these cases is the type of misconduct that puts investors at risk: false audit reports, failures relating to the detection of illegal acts, and a lack of independence,” said Claudius B. Modesti, the board’s director of enforcement and investigations. He added, “We want to reduce the availability of auditors who are willing to cut corners.”

The board said it had previously cited fraud in revoking audit firm registrations three times, once earlier this year and twice in 2009.



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