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Deloitte Settles Adelphia Case for $50 Million

The SEC alleged that ''even though the Big Four firm had identified Adelphia as one of its highest-risk clients, Deloitte failed to design an audit appropriately tailored to address audit-risk areas'' that it had identified.
Dave Cook, CFO.com | US
April 27, 2005

Deloitte & Touche LLP will pay $50 million to settle charges stemming from its fiscal 2000 audit of Adelphia Communications Corp., according to the Securities and Exchange Commission.

The $50 million will be paid into a fund to compensate victim's of Adelphia's fraud. Yesterday the company itself agreed to pay $715 million in compensation.

The SEC charges are contained in an administrative order, which found that the audit firm "failed to detect a massive fraud perpetrated by Adelphia and certain members of the Rigas family," and in an action filed in federal district court in Manhattan. The court filing alleged that "even though the Big Four firm had identified Adelphia as one of its highest-risk clients, Deloitte failed to design an audit appropriately tailored to address audit-risk areas" that it had identified.

"What is especially troubling here is that Deloitte recognized the risk of fraud posed by this client at the outset," said Mark Schonfeld, director of the SEC's Northeast Regional Office, in a statement.

Yesterday's agreement settles those charges with a $25 million penalty in the federal court action and $25 million to conclude the administrative proceeding.

As is common in such settlements with the SEC, Deloitte neither admitted nor denied the commission's findings. The Wall Street Journal reported, however, that the firm nearly torpedoed the settlement by releasing a statement saying its auditors were "deliberately misled."

In addition to the $25 million penalty — the largest ever for an accounting firm, according to The New York Times — and the $25 million for the SEC order, the firm also agreed to strengthen a risk-management program that had been in place during the Adelphia audit, reported the Associated Press. Changes include involvement of Deloitte's forensic accountants in planning "high-risk audits," more training in fraud detection for the firm's auditors, and retention of an independent consultant to review Deloitte's compliance, added the SEC.




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