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Deloitte’s Brazil Firm Covered Up a Couple of Bad Audits

The big news in the international audit firm world today is an announcement by the PCAOB that Deloitte’s Brazil firm audited badly and then covered up that bad auditing, which is also bad. The whole thing involved a dozen auditors including the Brazil firm’s former Audit Practice Leader, former Risk and Reputation Leader and former National Professional Practice Director.

The firm admitted to quality control violations and failure to cooperate with a PCAOB investigation, a first for a Big 4 firm. None of the dozen auditors involved were charged with any wrongdoing, but they all agreed to sanctions of one sort or another. Claudius Modesti, the PCAOB’s Director of Enforcement and Investigations said, "The orders released today detail some of the most serious misconduct the PCAOB has ever uncovered." Sure, they had to go all the way to Brazil to get, but still!

Compared to other regulatory enforcement orders you might read, this one appears tame. Don’t get me wrong, the auditing is pretty sloppy, but it’s the massive cover-up that really got Deloitte in trouble here and the fact that some leadership people were involved doesn’t look too good. This is from the order’s introduction:

Deloitte Brazil committed these violations through several personnel who were at the time some of its most senior partners, and who were entrusted with leadership and governance roles in the Firm during various stages of the misconduct, as well as through other partners and staff on two audit engagement teams.

The leaders who supervised and directed this misconduct not only set a tone of disregard for compliance with PCAOB rules and standards and PCAOB oversight, but also actively thwarted that oversight, to the detriment of investors.

The audits in question were of Gol Linhas Aéreas Inteligentes S.A. and a second unnamed issuer and it went like this:

1. Deloitte Brazil did some sloppy audits (e.g. insufficient evidence on maitenance deposits, deferred revenue).

2. Deloitte Brazil issued clean audit reports for Gol when they shouldn't have.

3. When the PCAOB announced that it would inspect the Gol audit, the engagement partner started directing people to alter workpapers on Gol and Issuer 2.

4. Those people altered the workpapers.

5. When the PCAOB open an “informal inquiry" into the Gol audit, Deloitte personnel, including senior partners, started obstructing the inquiry in various ways.

6. During the formal investigation, Deloitte personnel lied about the altering, obstructing, etc.

Or perhaps it's even easier to say: "Deloitte lied about their lying." When Deloitte finally performed an internal investigation, it found “that 56 work papers from the 2010 Gol Audit and fourteen work papers from the Gol quarterly reviews had been improperly altered.” I’m sure that’s not the worst case of workpaper manipulation ever, but that does seem like an awful lot!

Despite the widespread wrongdoing, there’s nothing too hilariously embarrassing in the order with the exception of this translated conversation between “Senior Partner 3” aka Maurício Pires de Andrade Resende, the former Risk and Reputation Leader and a Gol Senior Manager who recorded the chat:

If there’s one thing most professionals in US have learned, it’s to use ambiguous language whenever discussing sensitive and/or illegal matters. It doesn’t always work, but it’s rare that you read anything as blatantly obvious as this. Anyway, the order also states that “Certain Deloitte Brazil personnel subsequently took steps to dissuade the Gol Senior Manager from cooperating with the Division or asked the Gol Senior Manager not to reveal their participation in the obstruction.” I kinda wish those had gotten recorded.

All told, the people involved are no longer with Deloitte, won't be auditing US-listed companies anytime soon and the firm will pay an $8 million fine along with a bar on accepting new clients until an independent monitor approves progress on "achieving remedial benchmarks." Fun times!

[PCAOB Press Release, Order, Individual Respondents]

Correction: An earlier version of this post misstated the title of a PCAOB official. Claudius Modesti is Director of Enforcement and Investigations not Chief Auditor.