SEC Sanctions D&T Auditor For Independence Violations

by Dorsey & Whitney LLP
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A now retired Deloitte & Touche LLP partner settled charges that he violated the auditor independence rules, engaged in improper professional conduct and caused a firm audit client to violate Exchange Act Section 13(a). The violations are predicated on facts demonstrating that the partner took loans from a casino audit client, compromising the audit firm’s independence. In the Matter of James T. Adams, CPA, Adm. Proc. File No. 3-15876 (May 20, 2014).

Mr. Adams, a CPA, served as the Chief Risk Officer of Deloitte LLP from September 2005 through the end of May 2010 and was a partner of D&T, a subsidiary, from mid- 1985 until the end of May 2010. He worked for Deloitte and/or D&T and their predecessor entities from June 1974 until he retired in May 2010.

For approximately one year, beginning in mid-January 2009, Mr. Adams served as an advisory partner on D&T audit engagements for a Casino Gaming Issuer. In that role he served primarily as a liaison between D&T and the issuer’s management and audit committee. Prior to assuming that role he worked on the firm’s audit of the issuer’s financial statements for the fiscal years ended December 31, 2008 and 2009.

While serving as the advisory partner, Mr. Adams sought and received casino markers from a gaming establishment operated by the issuer. He visited that casino at least five times and executed markets, essentially a line of credit at the casino. In 2009 he executed markers and drew sums which exceeded $100,000. The markers remained outstanding for varying periods of time. In 2010 he defaulted on $110,000 of outstanding markers which has been drawn down in mid-December 2009.

Mr. Adams concealed his casino markers from D&T and lied to a partner who inquired generally about markers. At the time he retired the firm was not aware of the markers and borrowings.

In March 2010 Casino Gaming Issuer filed its annual report on Form 10-K with the Commission. It contained an audit report from D&T which stated, in part, that the audit of the financial statements had been conducted in accord with the standards of the PCAOB.

The audit opinion was incorrect. An accountant is not independent under Rule 2-01(b) of Regulation S-X if, under all the facts and circumstances, he is not capable of exercising objective and impartial judgment on all issues in the engagement. Rule 2-01(c) of Regulation S-X, which lists a series of circumstances that are inconsistent with independence, specifies that one such circumstance is a loan from an audit client. As a result of his conduct Mr. Adams caused D&T to violate Rule 2-02(b)(1) of Regulation S-X. His conduct also caused Casino Gaming Issuer to violate Exchange Act Section 13(a). In view of his conduct, Mr. Adams engaged in improper professional conduct within the meaning of Exchange Act Section 4C(A)(2) and Rule 102€(1)(ii) of the Rules of Practice, according to the Order.

Mr. Adams resolved the proceeding, consenting to the entry of a cease and desist order based on Rule 2-02(b)(1) of Regulation S-X and Exchange Act Section 13(a). He has been denied the privilege of appearing and practicing before the Commission as an accountant with a right to request reinstatement after two years.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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