PCAOB Imposes Record $8 Million Settlement With Deloitte Brazil

Chris Gaetano
Published Date:
Dec 6, 2016
By Miguelrangeljr - Brazil location map.svg by NordNordWestDi Betti, et al . (2003) Uma visão da Biodiversidade da Ecorregião das florestas do Alto Paraná - Bioma Mata Atlântica. WWF., CC BY-SA 3.0
The Public Company Accounting Oversight Board (PCAOB) announced that it has come to an $8 million settlement with Deloitte's Brazil affiliate, making it the biggest civil penalty the board has ever assessed. The fine was to settle charges including issuing materially false audit reports and attempting to cover up audit violations by improperly altering documents and providing false testimony.

The settlement concerns Deloitte Brazil's 2010 audit of a client, Gol Intelligent Airlines Inc., a Brazilian corporation listed on the New York Stock Exchange. The PCAOB said that Deloitte failed to obtain sufficient evidence that Gol accurately accounted for maintenance deposit assets and for its claims on reported and deferred revenue. The PCAOB also said that Deloitte's auditors also failed to address red flags indicating its clients internal controls were not operating effectively at year-end 2010. The PCAOB said that both management as well as the audit engagement partner knew that there were significant violations of PCAOB rules and standards, and that statements made in the audit report were materially false. Nevertheless, the engagement partner authorized the issuance of unqualified audit reports concerning Gol's 2010 financial statements and internal controls. 

What's more, according to the PCAOB, Deloitte Brazil instructed Gol to alter the work papers from the 2010 audit in anticipation of a 2012 board inspection. Despite efforts, the PCAOB suspected something was wrong and opened a formal inquiry in 2013. Senior leaders at Deloitte worked amid this investigation to further conceal misconduct by insisting the altered work papers were the originals and making numerous false statements to investigators that were consistent with the altered work papers, some of which were made under oath. Even as the PCAOB presented evidence of misconduct, firm members implicated in the scheme worked to avoid detection, even working against their own firm's internal investigation into the matter. However, new firm leaders who took their positions during the investigation provided the PCAOB with additional evidence that confirmed the wrongdoing, eventually leading to the settlement. 

Deloitte Brazil admitted that it violated quality control standards and failed to cooperate with a PCAOB inspection and investigation, the first admissions the PCAOB has obtained from a global network firm. After the PCAOB began an investigation of the audit, Deloitte Brazil took additional steps to conceal its audit deficiencies and work paper alterations, with the knowledge and participation of senior firm leaders. Multiple firm partners provided false testimony under oath and made false representations to PCAOB staff about the 2010 audit in an attempt to obstruct the PCAOB investigation.

"Deloitte Brazil failed in its public watchdog role to protect the interests of investors by issuing materially false audit reports," said Claudius B. Modesti, director of the PCAOB Division of Enforcement and Investigations. "The orders released today detail some of the most serious misconduct the PCAOB has ever uncovered."

In addition to the $8 million civil penalty, Deloitte Brazil agreed to sanctions including:

  • Censure
  • Undertakings to improve the firm's system of quality control
  • Appointment of an independent monitor to review and assess the firm's progress toward achieving remedial benchmarks
  • Immediate practice limitations, including a prohibition on accepting certain new audit work until the monitor confirms the firm's progress in achieving its remedial benchmarks
  • Additional professional education and training for the firm's audit staff

The 12 former Deloitte Brazil partners and other audit personnel sanctioned in the case included partners who held the senior leadership positions of risk and reputation leader, national professional practice director, and audit practice leader, in addition to six other partners and three other audit personnel. All but one were barred or suspended from associating with a registered public accounting firm.

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