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AUDITING
We're Sorry We Were Tricked
Posted by Tim Reason | CFO.com | US
April 27, 2005 9:54 AM ET

Today's Wall Street Journal (page C3) reports that Deloitte nearly torpedoed the $50 million Adelphia settlement I blogged yesterday by releasing a statement saying its auditors were "deliberately misled."

Whoops. Apparently the SEC felt that constituted a denial of the SEC's charges—a breach of the settlement agreement—and demanded that Deloitte withdraw it.

"They didn't just miss red flags, they pulled the flag over their heads and then claimed they couldn't see," the SEC's Mark Schonfeld told the Journal.

Yesterday's comment-filled blog addressed the pressure on auditors (and thanks, readers, for your thoughtful comments).

Here's another question, though. The neither "admit nor deny" construction that Deloitte apparently violated is a two-way street. It allows the SEC to issue, without contradiction, a lengthy order detailing what it considers to have been the company's failings, while allowing the company to avoid the added civil liability that would come from admitting guilt to a government enforcement agency.

Without that second part, the SEC would have a hard time getting companies to settle without trial, since, in theory, plaintiffs cannot use SEC settlements in their civil suits.

But that raises the question: How far does the SEC's prohibition on denial extend? Is Deloitte prevented from saying it was misled only in the statement about its settlement? Can executives say that to the press? (Probably not.) Can Deloitte claim it was "deliberately misled" when defending itself in civil court? (Probably, though I'm not sure.)

Some time ago, the Massachusetts Attorney General said he was going to do away with the idea of letting companies neither admit nor deny wrongdoing. There are enormous practical problems with this—if the SEC did the same, its trial section would be swamped. But the status quo results in some pretty weird distinctions.

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Uh-oh. American Business Daily yesterday quotes Deloitte CEO James Quigley also using language likely to be considered a settlement violation, to wit:

"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."


This sounds a lot like a press release statement, so my guess is the quote was also part of the offending statement that Deloitte was forced to withdraw. (They did a fine job of that—I can't find a trace of it).

Posted by CFO Staff: Tim Reason | April 27, 2005 10:10am

This story is growing as we blog. According to the Associated Press, Deloitte has not withdrawn Quigley's statement. See here.
Posted by CFO Staff: Tim Reason | April 27, 2005 10:30am

Here's the Deloitte USA release that is still posted, including Quigley's comment.
Posted by CFO Staff: Tim Reason | April 27, 2005 10:35am

What is the deal with Parmalat and Deloitte. Is another Andersen brewing here. $10 Billion lawsuit, could Deloitte pay that and stay in business?
Posted by Robert Parks | May 16, 2005 12:14pm

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