The Public Company Accounting Oversight Board (PCAOB) announced sanctions against the former Chairman and the former Chief Executive Officer of Brazil-based Deloitte Touche Tohmatsu Auditores Independentes (Deloitte Brazil) for failing to cooperate with a board investigation. The board censured Michael John Morrell, the former chairman of Deloitte Brazil, for contributing to the firm's failure to cooperate with a PCAOB investigation, fined him $35,000 and barred him from the industry for at least five years. Juarez Lopes de Araújo, Deloitte Brazil's former CEO and managing partner, received a permanent industry bar for his refusal to cooperate with the investigation by failing to testify about any knowledge he had of the firm's provision of false documents and information to PCAOB investigators.
According to Claudius B. Modesti, director of Enforcement and Investigations for the PCAOB, the “order against the former Chairman of Deloitte Brazil makes clear that the misconduct at the firm went all the way to the top, and our investigation persisted until we uncovered the extent of wrongdoing." He added that “the order against the former CEO demonstrates that individuals who refuse to cooperate with Board investigations face some of the stiffest sanctions."
The PCAOB actions resulted from misconduct by partners and staff members of Deloitte Brazil who issued false audit reports concerning the financial statements and internal control of an airline client, and then attempted to cover up the violations by improperly altering work papers and other documents, providing false testimony and otherwise obstructing a PCAOB inspection and subsequent board investigation. As it so often is, the cover-up was far worse than the underlying offenses.
As stated by the PCAOB:
Deloitte Brazil committed these violations through several personnel who were at the time some of its most senior partners, and who were entrusted with leadership and governance roles in the Firm during various stages of the misconduct, as well as through other partners and staff on two audit engagement teams. The leaders who supervised and directed this misconduct not only set a tone of disregard for compliance with PCAOB rules and standards and PCAOB oversight, but also actively thwarted that oversight, to the detriment of investors.
In a December 2016 order, Deloitte Brazil admitted to many of the PCAOB’s allegations of wrongdoing, and agreed to a series of remedial undertakings. The firm also consented to pay a record $8 million fine, and several individuals were sanctioned for their participation in the scheme.
The PCAOB alleged that Morrell knew that the firm provided improperly altered work papers to the PCAOB, and that he concurred in the plan to continue misleading the PCAOB. In the order, the PCAOB noted that Morrell was chairman of the firm's Policy Committee, and was "one of the partners with the most responsibility for setting an appropriate tone and establishing controls concerning integrity, ethics, and compliance" at the firm.
Araújo served both on the Policy Committee and the Executive Committee of Deloitte Brazil. He refused a board demand to appear and testify concerning his possible knowledge of or participation in the firm's provision of false documents and information to the PCAOB Division of Enforcement and Investigations.
This action is one of a series of enforcement cases brought by the PCAOB against foreign affiliates of global accounting firm networks. Earlier this month, the PCAOB announced sanctions against a former partner of PricewaterhouseCoopers Auditores Independentes in Brazil for audit failures and violations of PCAOB rules and standards, and the board has imposed disciplinary sanctions on several firms and individuals in other countries, including Indonesia and Mexico.
These cases highlight the difficulties of regulating these foreign audit firm affiliates. While these foreign affiliates are usually members of a global umbrella organization, each firm is typically a separate legal entity subject to home country regulation that operates independently of network members in the U.S. and elsewhere. The Deloitte affiliates are members of Deloitte Touche Tohmatsu Limited, a U.K. organization known as a “private company limited by guarantee.”
As Enforcement Director Modesti stated:
foreign operations of U.S. issuers are often reviewed by foreign auditors, including the local affiliates of major global accounting networks—such as Deloitte Brazil and Deloitte Mexico. U.S. investors rely on the work product of these foreign auditors when making investment decisions … while the benefits of globalization to capital formation and investment opportunities are significant, globalization introduces unique audit risks. These risks manifest themselves in differing corporate governance practices and business norms. These risks can also surface either in both the company's financial reporting and disclosure supply chain or in the execution of the audit by affiliated network firms—as they did in the Deloitte Brazil and Mexico matters.
"Audit quality is a global issue," added PCAOB Chairman James R. Doty. He noted that the board “is committed to investigating and disciplining auditors who present risks to investors in the U.S. markets, regardless of where the audit is conducted."
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