Two audit partners at Deloitte & Touche have agreed to be barred from practicing before the Securities and Exchange Commission to resolve a case involving auto parts maker Delphi.

After being spun off from parent company General Motors, Delphi misclassified a $112 million increase in its warranty reserves as a charge to stockholders' equity rather than to warranty expenses for the current period. The misclassification in the second quarter of 2000 was reflected in Delphi's quarterly and annual financial statements.

Delphi's improper treatment of the warranty reserve allowed it to increase the reserve and avoid a material increase in expenses, according to the SEC. Delphi later restated the accounting for the transaction and Deloitte signed off on the restatement.  Deloitte recently agreed to a settlement with investors in the case (see Deloitte to Pay $38.25M in Delphi Settlement).

The SEC said that audit partner Nicholas Difazio should not have accepted Delphi's view that it could use special accounting rules as opposed to the accounting rules that generally apply to contingencies and changes in estimates on warranty matters. Difazio provided a memorandum about the transaction to a concurring review partner at Deloitte, but did not consult with the firm's national office concerning Delphi's application of the special spin-off accounting treatment.

The SEC also listed another incident in which Delphi misclassified warranty expenses and Difazio did not sufficiently object or express professional skepticism, along with a third incident involving Delphi's repurchase of generator cores and batteries from a consulting company. Delphi had purported to sell $70 million of inventory to the consulting company in a Dec. 27, 2000, transaction, but made a secret side agreement to purchase back the same inventory of cores and batteries on Jan. 5, 2001. Again, the SEC believed that Difazio should have investigated the matter further and shown greater skepticism about Delphi's claims.

Duane Higgins, the other Deloitte audit partner who faced SEC sanctions, was also blamed for not investigating more closely Delphi's repurchase of cores and batteries. In addition, the SEC found fault with his review and audit of the sale and purchase of precious metals.

The audit partners did not admit or deny wrongdoing in the cases. After three years, Difazio may apply to practice before the SEC again, while Higgins may apply after two years.

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