Thursday, October 20, 2011

A Potentially Costly Combination: Deloitte, Taylor Bean and the PCAOB

If you follow news affecting auditors, you may have noticed that the PCAOB made a very rare disclosure yesterday about one of the big four firms, Deloitte. The PCAOB said that Deloitte was previously sanctioned for not being skeptical enough to challenge statements made by management and that they still have problems with this.

Normally, the PCAOB tells the big audit firms what they did wrong and gives them a year to fix it with the threat that they will disclose their failures after a year if the firm doesn't fix it. Well, they decided Deloitte was still dropping this ball so they disclosed it publicly. Importantly, the timing of this ball dropping may have been very detrimental to Deloitte. Here is why...
Recently, we blogged about Deloitte being sued for over $7 billion for it's audits of Taylor Bean, a firm that was heavily involved in the mortgage meltdown. The lawsuit claims that Deloitte was both negligent and turned a willful blind eye. Unfortunately for Deloitte, this recent PCAOB disclosure seems to provide some fuel to ignite that claim.

But this isn't all. As it turns out, at least one of the audits that the PCAOB references in their disclosure sounds like it may have either been Taylor Bean or someone very much like them. Here are some quotes from a Washington Post article that probably make the attorneys at Deloitte very uncomfortable:
“The firm’s apparent failure to appropriately challenge management’s representations occurred in numerous areas,” the report by (the PCAOB) said.
Though Deloitte was alerted to the problems in spring 2008, a year later it had failed to fix them, according to the oversight board. It’s unclear whether the failings were subsequently addressed because the board’s more-recent findings remain confidential.
The audits at issue date from a period when the United States was sliding toward a financial crisis, and at least one was of a company involved in mortgage investments.
At that company, identified only as “Issuer E,” the oversight board accused Deloitte of failing to properly assess such matters as the value of mortgage-backed securities, the accounting for delinquent loans and the treatment of financial instruments known as swaps, a form of derivative.
This sounds like it very well could have been Taylor Bean and, even if it wasn't, I'm betting that the attorneys suing Deloitte are going to be drawing the parallel...

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