Washington, D.C., April 26, 2005 – LAWFUEL – The Law News Network – The Securities and Exchange Commission today announced that Deloitte & Touche LLP has agreed to pay $50 million to settle charges stemming from its audit of Adelphia Communications Corporation’s fiscal year 2000 financial statements.
The Commission issued an Order that finds that Deloitte engaged in improper professional conduct and caused Adelphia’s violations of the recordkeeping provisions of the securities laws because it failed to detect a massive fraud perpetrated by Adelphia and certain members of the Rigas family. In addition, the Commission filed a federal district court action alleging that Deloitte failed to implement audit procedures designed to detect the illegal acts at Adelphia. The $50 million payment will be deposited into a fund established to compensate victims.
Mark K. Schonfeld, Director of the SEC’s Northeast Regional Office said, “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.”
The SEC’s charges against Deloitte are contained in an administrative order issued by the SEC and a complaint filed by the SEC in federal court in Manhattan. The SEC order finds that Deloitte engaged in improper professional conduct and caused certain of Adelphia’s books and records violations by failing to detect a massive fraud perpetrated by Adelphia and certain members of the Rigas family. Even though Deloitte identified Adelphia as one of its highest risk clients, Deloitte failed to design an audit appropriately tailored to address audit risk areas that Deloitte had explicitly identified. Specifically, Deloitte issued an audit report containing an unqualified opinion on Adelphia’s financial statements for fiscal year 2000 while Deloitte knew or should have known that Adelphia: (a) failed to record all debt on its balance sheet or otherwise failed to disclose that it had improperly excluded $1.6 billion in debt from its balance sheet; (b) failed to disclose significant related party transactions; and (c) overstated its stockholders’ equity by $375 million. In the federal court complaint, the SEC charged Deloitte with failing to implement audit procedures designed to detect the illegal acts at Adelphia.
In settlement of the SEC’s charges, Deloitte will pay $50 million, consisting of a $25 million penalty in the federal court action, subject to court approval, and an agreement to pay another $25 million in settlement of the administrative proceeding. The entire $50 million will be paid into a fund for compensation of victims of the Adelphia fraud. Deloitte has also agreed to substantive undertakings designed to address its audit of high-risk clients in the future, including the involvement of Deloitte’s forensic accounting specialists in planning high-risk audits, increased training of Deloitte’s audit professionals in fraud detection, increased partner involvement in review of audit work papers, and the retention of an independent consultant to review Deloitte’s compliance with these undertakings. Deloitte has agreed to the settlement without admitting or denying the findings in the SEC’s order or the allegations in the SEC’s complaint. Today the Commission also instituted settled administrative proceedings against Deloitte based upon its failed audit of the financial statements of Just for Feet, Inc.