The Public Company Accounting Oversight Board said on Tuesday that Brazil-based Deloitte Touche Tohmatsu Auditores Independentes will pay an $8 million civil penalty, the largest ever imposed by the PCAOB, to settle charges of issuing materially false audit reports and attempting to cover up audit violations.
In addition to the penalty, the PCAOB announced sanctions against 12 former partners and other audit personnel of the firm. A former engagement partner also was charged with causing the firm to issue materially false audit reports.
The PCAOB found that Deloitte Brazil knowingly issued materially false audit reports for the 2010 financial statements and internal control over financial reporting of Brazilian issuer Gol Linhas Aéreas Inteligentes.
The PCAOB said that Deloitte Brazil’s audit of Gol violated a number of rules and standards: the firm’s engagement team failed to obtain sufficient competent evidence that Gol was accurately accounting for its “maintenance deposit” assets; failed to obtain sufficient competent evidence that Gol’s reported revenue and deferred revenue were materially accurate; and failed to address red flags indicating that Gol’s ICFR was not operating effectively at year-end 2010.
In advance of a 2012 PCAOB inspection, a Deloitte Brazil engagement partner, who also served as the firm’s audit practice leader, directed junior personnel to alter work papers from the 2010 audit to conceal known audit deficiencies, the PCAOB said. The firm presented the improperly altered work papers, as well as other misleading documents and information, to PCAOB inspectors.
Once the PCAOB investigation of the audit began, Deloitte Brazil took additional steps to conceal its audit deficiencies and work-paper alterations, the PCAOB says. “Multiple firm partners provided false testimony under oath and made false representations to PCAOB staff about the 2010 audit in an attempt to obstruct the PCAOB investigation,” according to a PCAOB press release.
“Deloitte Brazil failed in its public watchdog role to protect the interests of investors by issuing materially false audit reports,” said Claudius B. Modesti, director of the PCAOB division of enforcement and investigations. “The orders released today detail some of the most serious misconduct the PCAOB has ever uncovered.”
Deloitte Brazil is the first global network firm to admit to charges of violations brought by the PCAOB. In addition to the penalty, Deloitte Brazil agreed to other sanctions, including appointment of an independent monitor to review and assess the firm’s progress toward achieving remedial benchmarks. It also agreed to immediate practice limitations, including a prohibition on accepting certain new audit work until the monitor confirms the firm’s progress in achieving its remedial benchmarks.
The 12 former Deloitte Brazil partners and other audit personnel sanctioned in the case included partners who held the senior leadership positions of risk and reputation leader, national professional practice director, and audit practice leader, in addition to six other partners and three other audit personnel, the PCAOB said. All but one were barred or suspended from associating with a registered public accounting firm.
“The firm leaders who participated in the misconduct not only set a tone of disregard for compliance with PCAOB rules, standards, and oversight, but also actively subverted that oversight,” said Director Modesti.
The PCAOB said it received “extraordinary cooperation” from one individual — a senior manager on the audit team — after he reported to PCAOB staff that senior firm management was obstructing the PCAOB investigation.