Deloitte & Touche has agreed to pay a $1 million penalty to settle accusations by the Public Company Accounting Oversight Board (PCAOB) that it allowed a partner who had performed poor audits in the past to conduct the 2003 audit of Ligand Pharmaceuticals, a public company based in San Diego. Under a provision of the Sarbanes-Oxley Act of 2002, the money will be used for accounting scholarships.
The Deloitte partner, James L. Fazio, signed off on Ligand's books in 2003, but the company later restated the financial results for this year and other periods because its revenue recognition policy did not comply with U.S. GAAP, The Wall Street Journal reports. The restatement increased the company's net loss for 2003 by two and one-half times, according to the PCAOB report.
Ligand had reported aggressive sales of drugs to wholesalers that had a right to return unsold drugs, but was required to report the sales net of estimated returns. Ligand "had a history of substantially underestimating such returns," the Journal reports, and Fazio neither performed nor ensured the performance of procedures that took into account the company's ability to make reasonable estimates of product returns, the PCAOB report says, according to Reuters..
"A firm is responsible for its audit reports and the quality of its audits," said Claudius B. Modesti, the PCAOB's director for enforcement and investigations, according to The New York Times. "We think the sanctions reflect the seriousness of the violations."
The PCAOB's report also faulted Fazio for not adequately supervising others and Deloitte for leaving him on the job when some managers had decided he should resign from the firm, the Journal reports.
Fazio resigned from Deloitte in 2005 and is barred from participating in a public company audit for two years.
Deloitte neither admitted or denied the accusations of the oversight board. It said in a statement that it was committed to efforts to improve audit quality and supported the role of the PCAOB. The firm said that it had implemented changes to its quality control policies and procedures that directly address the PCAOB's concerns.
The PCAOB's disciplinary action against Deloitte is the first against one of the Big Four accounting firms. The board's chairman, Mark Olson, told reporters, according to Reuters, that it was "reasonable to expect that there will be other" enforcement actions against the larger auditors, since they are responsible for a large percentage of public company audits.