Deloitte & Touche LLP is being investigated by the Public Company Accounting Oversight Board (PCAOB) for auditing discrepancies in their 2003 audit of Navistar Financial Corporation. The two-page order, issued in May, was inadvertently disclosed by the Securities and Exchange Commission (SEC) which oversees the PCAOB. Navistar Financial is a unit of Navistar International Corporation.
âThe order was misdirected to the public file,â said SEC spokesman John Heine in a statement to Bloomberg News. âWe are taking appropriate steps to improve procedures.â
The order states that Deloitte's work in the Navistar audit might have failed to comply with at least five auditing standards. These actions may be âin possible violation of [Sarbanes-Oxley], the rules of the board, the provisions of the securities laws relating to the preparation of and issuance of audit reports and the obligations and liabilities of accountants,â according to the PCAOB order.
The investigation of the accounting firm has to do with Deloitte's audit of Navistar Financial for which the company restated financial results for 2002, 2003, and the first three quarters of fiscal 2004. The PCAOB advised Deloitte that the company's accounting was inaccurate. The SEC is investigating the financial unit's accounting is connection with Navistar's restatement of financial results.
The SEC disagreed with Deloitte's application of an accounting rule concerning loan securitizations forcing the company to add $4.2 million to the financial unit's fiscal 2002 net income (or $37.9 million) and take fiscal 2003 profits down by about $2 million to $55.5 million. This rule governing current liabilities was also misapplied by KPMG LLP, Ernst & Young LLP, and PriceWaterhouseCoopers LLP in other corporate audits according to the Chicago Tribune.
âIt's a timing issue,â said Brian Rayle, a Navistar analyst at FTN Midwest Securities Corporation said in a statement to Bloomberg News. "The SEC said you have to recognize more income upfront.â
âThe PCAOB has been a standard-setter and a rule maker,â Roy Van Brunt, a former assistant chief accountant at the SEC and current managing director at FTI Consulting Inc. in Annapolis (MD). âThe board is maturing into becoming a policeman.â The board was created by Congress in 2002 with the passage of the Sarbanes-Oxley Act. This is the first formal investigation of a Big Four accounting firm according to Bloomberg News.
The investigation of Deloitte was reported after a Bloomberg reporter found the two-page order sanctioning the investigation in the public reference room at the SEC although it was marked ânon-public.â The order was apparently received from the PCAOB on May 25 and made available in its reference room during the week of June 20. The SEC has since removed the order from public access.