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Oversight board faults Deloitte audits

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The big accounting firm Deloitte & Touche has taken the word of companies that it audited instead of properly performing its watchdog function, according to a report released Monday.

“The firm’s apparent failure to appropriately challenge management’s representations occurred in numerous areas,” the report by an industry oversight board 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.

The findings were disclosed Monday by the Public Company Accounting Oversight Board, which was created in the aftermath of the Enron and WorldCom scandals to police firms that audit companies listed on the stock markets.

In a statement, Deloitte chief executive Joe Echevarria said his firm “is committed to the highest standards of audit quality.”

“We have complete confidence in our professionals and the quality of our audits, and agree that there were and always will be areas where we can improve,” Echevarria said.

The firm has been investing in improvements, he added.

Findings restricted

The law that created the oversight board sharply restricted what it can disclose to the public, assuring that certain findings would come to light only after a long delay if ever.

The findings released Monday were part two of a report dated May 19, 2008, addressing audits of 2006 financial statements.

Auditors are supposed to check companies’ internal controls, but the report said Deloitte’s own quality controls fell short.

The board said that it can release that information only if firms fail to correct the weaknesses within a year, and only after firms that choose to challenge such findings have exhausted confidential appeals to the Securities and Exchange Commission.

Monday’s disclosure was the first of its kind involving one of the Big Four accounting firms, which together audit the vast majority of publicly traded companies in the United States.

Audit firms are supposed to look out for the interests of investors, but they have a basic conflict of interest: They are hired and paid by the companies they audit.

The oversight board is considering a number of changes to make the accountants more accountable, including requiring companies to switch audit firms periodically. Last week, the board proposed a rule that would force audit firms to disclose the names of the accountants who lead each audit.

The report on Deloitte said the firm’s deficiencies may reflect a culture that does not demand enough “critical analysis” or “objective evidence” and instead relies largely on what its clients say. The report did not name the companies for which Deloitte allegedly performed inadequate audits.

The report calls into question how much investors can trust the financial reports that companies issue, and whether they can confidently put their money in the stock market, said J. Edward Ketz, associate professor of accounting at Penn State.

Almost a decade after the collapse of Enron and its auditor, Arthur Andersen, Ketz said, “In my judgment there’s not been the necessary changes to the audit firms or the audit firm structure to expect significantly better audits than we had in 2001.”

Last month, according to a Bloomberg report, a bankruptcy trustee for defunct mortgage lender Taylor, Bean & Whitaker sued Deloitte for damages of $7.6 billion, saying that if Deloitte had not turned a “willful blind eye,” a mortgage fraud allegedly carried out by the firm’s chairman would have sputtered out much earlier.

Deloitte said the lawsuit’s claims were “utterly without merit.”

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