By Carrie Johnson
Washington Post Staff Writer
Tuesday, December 11, 2007

Accounting firm Deloitte & Touche agreed yesterday to pay $1 million to resolve charges over faulty work for a pharmaceutical company in the first major disciplinary case filed by the board that oversees the audit industry.

James L. Fazio, a former Deloitte accountant who handled a 2003 audit of Ligand Pharmaceuticals, will be barred from reviewing the books of public companies for at least two years as part of the settlement, in which he and the firm did not admit wrongdoing.

The case amounts to the first action that the Public Company Accounting Oversight Board has pursued against one of the audit industry's four largest firms since its creation more than five years ago after the Enron and WorldCom scandals.

Mark W. Olson, the panel's chairman, said yesterday's disciplinary proceedings are "important examples of holding the audit profession accountable . . . to protect the investing public."

The audit panel faulted Deloitte and Fazio for failing to vet revenue that Ligand had reported on sales of products that customers had an option to return. Ligand had "consistently underestimated" such returns, but Fazio accepted the company's estimates without much evidence or skepticism, according to the disciplinary order.

Deloitte executives in the firm's national office and quality-control group raised "serious questions" about Fazio's competence but nonetheless allowed him to sign off on Ligand's 2003 financial statements, even after they determined that he should be removed from the field and resign from the firm, the board said.

A Deloitte spokeswoman issued a statement saying the firm is "committed to the profession's ongoing efforts to improve audit quality." The firm has altered its procedures to address regulators' concerns and is confident that its practices meet or exceed industry standards, she said. A lawyer for Fazio, Bert Deixler, did not return calls seeking comment yesterday.

While the PCAOB has taken action against 10 accounting firms during its lifespan, yesterday's case marks the first among the industry's biggest players as well as the first financial penalty. Christopher M. Cutler, who has worked at the Securities and Exchange Commission and the audit board, said the Deloitte case is a milestone.

"It shows that the PCAOB's Enforcement Division is fully mature and also that we should expect to see within a short period of time additional cases against not only other Big Four firms, but against the so-called second four firms as well," Cutler said.