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The AAO Weblog covers accounting issues and current events as they relate the practice of investment analysis.

Apr 27

Written by: Jack Ciesielski
4/27/2005 6:40 AM 

Yesterday, Deloitte announced its settlement with the SEC for its role as auditor in the Adelphia Communications and Just For Feet frauds. That press release is quite a bit different in tone from the SEC's release on Adelphia and Just For Feet; it all depends on your point of view.

The Deloitte version of the event focuses on "global" blame. According to Deloitte USA CEO James Quigley: “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 external auditors. Deloitte & Touche LLP has implemented, and will continue to implement, a number of additional improvements in its policies and procedures for auditing clients in its risk management program and to aid in uncovering fraudulent activity in a more timely manner.”

And the SEC was unsparing in its criticism of Deloitte's failings. Regarding Adelphia: "What is especially troubling here is that Deloitte recognized the risk of fraud posed by this client at the outset. When auditors turn a blind eye toward misconduct on a high-risk client and allow a fraud of this magnitude to go undetected, the consequences will be severe." Regarding Just For Feet: "Auditing firms and their personnel are responsible for exercising professional care and maintaining skepticism in auditing financial statements, particularly when the company is identified as having a high risk of potential fraud... Shareholders depend on auditing firms as a check on the honesty of management. They are expected to respond appropriately to wrongdoing, adequately test the claims made by management and complete the work supporting the audit before issuing an audit report."

That Deloitte press release is actually Round Two. The Wall Street Journal carries a very interesting account of the difference between the first version and the current one.