Deloitte Statement Irks SEC

Irritated by what they see as D&T's denial of the commission's finding in the Adelphia and Just for Feet cases, commission officials reportedly for...
Stephen TaubApril 28, 2005

The Securities and Exchange Commission is reportedly rankled by a statement by a Deloitte and Touche chief executive that the commission regards as a denial of liability involving two recent settlements between the commission and the auditor.

In a statement referring to both the Adelphia and the Just for Feet settlements, James Quigley, CEO of Deloitte & Touche USA LLP, said, “Deloitte & Touche LLP shares with the SEC a mutual interest in strengthening investor confidence in the capital markets through the ongoing enhancement of higher quality audit.”

Quigley went on to say that the 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.”

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That last statement reportedly irritated the SEC. The Wall Street Journal pointed out that under terms of the settlement agreements, Deloitte must neither admit nor deny the SEC’s charges.

SEC officials interpreted Deloitte’s statement as a denial of liability—especially in the Adelphia case—and forced Deloitte to rescind it, according to the paper.

“Deloitte’s characterization of the case is simply wrong. Deloitte was not deceived,” the SEC’s Schonfeld told the paper. “They didn’t just miss red flags, they pulled the flag over their head and then claimed they couldn’t see.”

In the Adelphia settlement, Deloitte & Touche LLP, without admitting or denying the SEC’s findings, agreed to pay $50 million to settle charges stemming from the communication company’s 2000 financials. At the same time, the commission reached a settlement with Just for Feet for $375,000.

In a separate release issued on April 26, the same day as the Adelphia announcement, the SEC reported that D&T settled charges stemming from its failed audit in 1999 of the fiscal 1998 financial statements of Just for Feet, Inc., a now-defunct shoe and sports apparel retailer. The engagement partner, Steven Barry, and the audit manager, Karen Baker, were also charged.

Without admitting or denying the SEC’s findings in the footwear case, Deloitte agreed to accept a censure and pay $375,000 to settle the charges, while Barry and Baker each agreed to be suspended from auditing publicly-traded companies and can seek reinstatement after two years and one year, respectively.

“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,” said Richard Wessel, district administrator of the commission’s Atlanta District Office.

The SEC charged that Just for Feet falsified its financials by improperly reporting “unearned and fictitious receivables and revenue from its vendors,” failing to properly book “excess, worthless, and obsolete inventory” and to reveal excess-inventory problems, and improperly recording the value of vendor-provided display booths as income.

Deloitte, Barry, and Baker “reasonably should have known that Just for Feet’s 1998 financial statements had not been prepared in accordance with generally accepted accounting principles,” according to the SEC.

The SEC also found that the firm and the two auditors didn’t respond enough to signs that Just for Feet was booking “unearned and fraudulent vendor allowances as income.” It also cited them for failing to do enough testing of the company’s obsolete or excess-inventory reserves and for failing a weak response to suggestions that Just for Feet was fraudulently boosting its income via “fictitious purchases of display booths from its vendors.”