Deloitte Touche Tohmatsu LLC, commonly referred to as Deloitte Japan, has agreed to pay $2 million in settlement charges to the Securities and Exchange Commission ("SEC") for violating the SEC's auditor independence rules.
According to the SEC, Deloitte Japan had issued audit reports for an unnamed client bank, when 89 Deloitte Japan partners and employees held accounts at the bank's subsidiary, with balances exceeding Federal Deposit Insurance Corporation ("FDIC") and other depositary insurance maximums. Among the 89 individuals whose independence was allegedly compromised under the SEC standards was then-CEO Futomichi Amano.
The SEC also alleged that Deloitte Japan knew, but failed to disclose, that Mr. Amano had bank balances with the subsidiary that compromised his independence.
As a result, Deloitte Japan was deemed to have a conflict of interest that compromised the audit and to have violated the auditor independence rules.
The Failure to Uphold Auditor Independence Standards
According to the SEC, Deloitte Japan failed to properly train or supervise employees about the independence rules, with regulators discovering that the firm's quality control systems did not provide the necessary reasonable assurances that the firm and its auditors were independent of their audit clients.
Specifically, the SEC alleged that the firm had not adequately monitored its office of independence and had compounded their error by making deposits to partners' bank accounts that exceeded the deposit insurance limits.
In the SEC press release, Melissa Hodgman, Associate Director of the SEC's Division of Enforcement, states:
"Auditor independence is critical to the integrity of the financial reporting process. The auditor independence rules addressing bank account balances that exceed deposit insurance limits are clear, and audit firms must devote adequate resources to ensuring the independence of the firm and its personnel."
Maintaining Auditor Independence: Identifying Potential Conflicts of Interest
It is of critical importance for firms to understand both the regulations related to auditor independence and the scope of their own business interests and activities.
According to SEC regulations, public companies are required to be audited annually by an independent public accountant registered with, and subject to inspection by, the Public Company Accounting Oversight Board (PCAOB), and the auditor must be independent under SEC Regulation S-X, with the audit conducted under US auditing standards.
Any conflicts of interest that compromise the integrity of the audit must be identified and appropriate action taken to avoid invalidating the audit and putting associated parties at risk of enforcement.
The circumstances highlighted in the Deloitte Japan case make it clear that conflicts of interest analysis is of paramount importance for all SEC-facing companies (i.e. large, small. public private, etc.).
Contact Us for Assistance
We strongly encourage firms to examine their business activities for potential conflicts of interest to be sure they meet the auditor independence regulatory standards.
No firm wants to be blindsided with regulatory enforcement at some unknown point down the road when a conflict related to auditor independence (or any conflict of interest, for that matter) could have been identified and preemptively avoided.
Robert Conca has over 19 years of experience advising businesses and financial professionals. He has acted both in legal counsel and senior executive capacities for companies spanning all stages of development. From start-ups to ...
Add a comment
- SEC Requests Proposals to Innovate Markets for Thinly Traded Securities
- PricewaterhouseCoopers LLP pays $7.9 to settle SEC Improper Professional Conduct, Auditor Independence Charges
- HCR Advisors Settles SEC Charges on Failure to Supervise and Implement Compliance-Related Policies and Procedures
- Amadeus Wealth Advisors, Three Bridge Wealth Advisors Settle SEC Unlawful Proxy Charges
- Charging Fees for Inactive Accounts can be as Problematic as Churning
- SEC: Prudential Failed to Disclose Conflicts of Interest to Fund Boards
- SEC Charges Investment Bank Junior Analyst with Insider Trading
- SEC Files Charges in Fraudulent Token Manipulation Scheme
- OCIE Risk Alert: Guidance for Compliance, Supervisory and Disclosure Procedures
- Jury Returns Verdict for SEC in Case Against Broker Charged with Fraudulent Excessive Trading
- Advisers Act
- Investment Advisers
- Policies and Procedures
- Office of Compliance Inspections and Examinations (OCIE)
- Ponzi Scheme
- Form U5
- Aging Clients
- Due Diligence
- Virtual Currency
- Dodd-Frank Act
- Regulation Best Interest
- Transition Services
- Private Equity
- Private Funds
- Hedge Funds
- Regulatory Examinations
- Personally Identifiable Information (PII)
- Government Shutdown
- Risk Alert
- Social Media Marketing
- Exchange-Traded Funds (ETFs)
- Investment Company Act
- Rule 6c
- Broker Protocol
- Wells Fargo
- Securities and Exchange Commission (SEC)
- Securities Law