The Securities and Exchange Commission Wednesday charged Deloitte & Touche LLP with violating auditor independence rules when its consulting affiliate kept a business relationship with a trustee serving on the boards and audit committees of three funds Deloitte audited.
Deloitte agreed to pay more than $1 million to settle the charges.
The SEC also charged the trustee Andrew C. Boynton with causing related reporting violations by the funds, and charged the funds’ administrator ALPS Fund Services with causing related compliance violations. They also agreed to settle the charges.
Deloitte disgorged to the SEC audit fees of nearly $500,000 plus prejudgment interest of about $116,000, and it paid a penalty of $500,000.
Boynton disgorged $30,000 plus prejudgment interest of about $5,000 and paid a penalty of $25,000.
ALPS paid a $45,000 penalty.
Auditor independence rules require outside auditors to “remain independent from their clients to ensure there is not even the appearance of a firm compromising its objectivity and impartiality when auditing financial statements.”
The SEC settled the case through an internal administrative order and didn’t go to court.
Deloitte violated its own policies by failing to conduct an independence consultation before starting a new business relationship with Boynton, the SEC said.
Deloitte failed to discover that the required initial independence consultation was not performed until nearly five years after the independence-impairing relationship had been established between Deloitte Consulting LLP and Boynton, who was paid consulting fees for his external client work.
“Meanwhile, Deloitte represented in audit reports that it was independent of the three funds while Boynton simultaneously served on their boards and audit committees,” the SEC said.
According to the SEC’s order (pdf),
- Deloitte Consulting acquired a proprietary brainstorming business methodology from Boynton in 2006 and collaborated with Boynton to implement it and serve both internal and external firm clients through 2011.
- As a member of the three funds’ boards and audit committees, Boynton was required to complete annual trustee and officer (T&O) questionnaires designed in part to identify conflicts of interest. He didn’t identify his business relationship with Deloitte Consulting in response to a question calling for identification of his “principal occupation(s) and other positions.” He also didn’t identify the business relationship in his responses to a question added to the questionnaire in 2009 inquiring whether he had any “direct or material indirect business relationship” with Deloitte.
- ALPS contractually agreed to assist the funds in discharging their responsibilities but failed to adopt sufficient written policies and procedures as required to prevent auditor independence violations. The funds’ audit committee charter addressed auditor independence generally, but the T&O questionnaires did not expressly cover business relationships with the auditor’s affiliates. The funds also didn’t have sufficient written policies and procedures to prevent other types of auditor independence violations, nor did they provide sufficient training to assist board members in the discharge of their responsibilities related to auditor independence.
The SEC’s order censured Deloitte & Touche LLP for violating the auditor independence standards and sanctioned it for causing the funds to violate the Investment Company Act.
Richard L. Cassin is the publisher and editor of the FCPA Blog. He can be contacted here.