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SEC punishes Deloitte Japan for violating auditor independence rules

The Securities and Exchange Commission fined Deloitte Touche Tohmatsu LLC $2 million for violating auditor independence rules and suspended its former CEO and director of independence for causing the violations.

The SEC said Wednesday that Deloitte Japan issued audit reports for a banking client while about 90 Deloitte Japan employees maintained accounts with the bank.

Deloitte Japan’s former CEO Futomichi Amano and former reputation and risk leader and director of independence Yuji Itagaki “both engaged in improper professional conduct by violating the personal financial relationship provisions” of the SEC rules. 

Amano and Itagaki also failed “to correct or disclose” their violations, according to the SEC’s administrative order (pdf).

Amano was barred from practicing before the SEC for at least two years and Itagaki was barred for a year. During their suspensions they can’t appear or practice before the SEC as accountants or participate in the financial reporting or audits of public companies.

Deloitte Japan, Amano, and Itagaki consented to the SEC’s order without admitting or denying the findings.

Under SEC rules, accountants aren’t considered independent if they maintain bank accounts with an audit client with balances greater than FDIC or similar depositary insurance limits. The limit when the violations happened was about $97,000.

The SEC said Deloitte Japan “knew but failed to adequately disclose that Amano maintained bank account balances with the audit client’s subsidiary bank that compromised his independence.” 

A subsequent internal investigation “revealed that 88 other Deloitte Japan employees had financial relationships with the audit client that compromised their independence as well,” the SEC said. 

Deloitte Japan didn’t properly train or supervise employees about the independence rules, the SEC said.

The SEC’s Melissa Hodgman said Wednesday that auditor independence is “critical to the integrity of the financial reporting process.” She said SEC rules about account balances that exceed deposit insurance limits are clear.

The SEC said Deloitte Japan took remedial action to improve compliance and cooperated with the agency’s investigation.

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Richard L. Cassin is editor at large of the FCPA Blog.

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