Litigation, Censures and Fines (Research Paper Sample)

Assignment 2: Litigation, Censures and Fines
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Deloitte & Touche LLP
Deloitte & Touche LLP was in October 2013 censured, fined 2 million dollars by the Public Accounting Oversight Board (PCAOB) and required to take remedial actions. This followed a violation of the Sarbanes-Oxley Act under Section 105(c) and PCAOB Rule 5200(a)(1); where Deloitte allowed its former partner who was under suspension from the Board to become an ‘associated person’, during the suspension period. Deloitte violated the Act as well as PCAOB rules by permitting Christopher E. Anderson to remain or become an associated person during a time when he was barred from associating with a registered public accounting firm as a result of the Board order. This order was as a result of Anderson’s violation of PCAOB rules and audit standards while acting as the engagement partner for Deloitte Navistar Financial Corporation’s financial statements in 2003. (PCAOB, 2013).
The primary accounting issue in this case is violation of the Sarbanes Oxley Act as well as failure to adhere to the PCAOB rules which restrict public accounting firms from permitting suspended individuals to remain as associated persons of the firm without the Board’s consent or the Securities and Exchange Commission. This can be considered a serious case of accounting fraud because by allowing such persons to remain associated persons, a firm is not upholding its duty to protect accounting standards. The impact of this on the firm is that besides losing money in the form of fines and thus affecting its profitability, the company’s reputation could be affected to a significant level because it emerges as one which is not compliant to rules and regulations (Ketz, 2006). Such an act creates doubts on the firm’s objectivity and thus brings in trust issues as far as clients are concerned (Ketz, 2006). This may lead to the loss of future business opportunities; with clients fearing that that they may be dealing with a ‘rogue’ organization. As noted by Duska (2003, clients are more likely to deal with compliant organizations and tend to avoid organizations that are constantly facing litigation for non-compliance. Lastly, Deloitte risks the possibility of having a repeat incident of the offence committed by Anderson. This is because they do not subject him to the one year suspension and he may not take the previous penalty seriously. Penalties and punishments such as suspension in Anderson’s case are meant to instill discipline but since he continued to serve as an associated person and did not experience the impact of the punishment, he may end up repeating the same violation. This could further taint the name of the company.
Corporate ethical issues emerging from this case include non-compliance, objectivity and professional competence. Accounting firms are expected to exhibit professional behavior and thus comply with the laws and regulations of the country as well as requirements by accounting boards (IFAC, 2009). Deloitte failed to comply with the Act as well as the PCAOB rules bringing forth an issue of corporate ethical responsibility. The question of objectivity arises as to why Deloitte still allowed Anderson to continue acting as an associated person and what their motive was. It also leads one to question whether Deloitte did not consider his violation a serious issue since they allowed him to keep acting as an associated person. Lastly, there is the issue of professional competence which generally emerges due to the fact that Deloitte allowed Anderson to continue performing duties related to audit, knowing that he was not allowed by the PCAOB and this could have an implication on his clients’ outcomes.
The primary ethical standard of the organization’s leadership contributing to this case can be linked to professional competence. Leaders are expected to maintain professional knowledge and skills including proper awareness of legislations and development in practice (IFAC, 2009; Clements, Neill and Stovall, 2009). In this case, Deloitte’s leadership does not seem to have adequate knowledge of what the PCAOB suspension entails. On the day the Order against Anderson was issued, Deloitte’s CEO circulated the order to principals, directors and partners instructing them to restrict Anderson from "audit work”. The email however did not provide further specifics to Anderson’s limitation and he ended up being involved in various roles including the development of quality control policies at Deloitte, drafting audit guidance, development of material; all which are designed to help the team in understanding their responsibilities and promote compliance with professional auditing standards. He also acted as a consultation resource and often guided the engagement team members in interpreting policies and procedures concerned with audit standards. In this relation, Deloitte was said to have permitted Anderson to remain an associated person because he engaged in activities in connection with audit reports for the company’s issuer clients during the year he was in suspension (PCAOB, 2013). Had the leadership embraced professional competence, they would have been aware of the implications of such actions and hence desist from engaging Anderson in such matters.
The specific conduct violations performed by Deloitte as provided for in the professional code of conduct for auditors is failure to exercise professional behavior, professional competence and due care. As noted above, managers are expected to have adequate information and knowledge on various matters associated with the accounting profession in order to avoid possible violations (Clements, Neill and Stovall, 2009). In addition, enhancing compliance calls for proper understanding of laws and regulations in order to ensure that the organization’s activities are within the required limits. Given that these codes of conduct were not met in Deloitte’s case, the actions ag...