The Public Company Accounting Oversight Board has imposed a $1 million penalty on Deloitte & Touche and issued orders instituting disciplinary proceedings against the firm and one of its former audit partners for a 2003 audit of Ligand Pharmaceuticals.
The PCAOB said Deloitte had consented to the civil money penalty and would also make changes in its procedures. Deloitte's former audit partner, James L. Fazio, 46, has consented to an order barring him from being an associated person of a public accounting firm registered with the PCAOB, although he may reapply after two years. Fazio resigned from Deloitte in 2005.
The case stems from a 2003 audit of Ligand that Fazio led for Deloitte. The PCAOB said he failed to perform the appropriate audit procedures of the company's estimates of future product returns, even after Deloitte had assessed the engagement risk as greater than normal. His procedures should have taken into account Ligand's historical tendency to underestimate future product returns, said the PCAOB, and he failed to show the due care and skepticism required.
The PCAOB said that Deloitte management knew about the problems even before it issued its 2003 audit report. "Firm management was aware of facts and circumstances that raised questions about Mr. Fazio's ability to lead public company audit engagements," said the PCAOB. "Certain members of Deloitte's management concluded first that Mr. Fazio should be removed from public company audits and ultimately that he should be asked to resign from the firm. Yet the firm left Mr. Fazio in place as the engagement partner and did not take meaningful steps to assure the quality of the audit work before issuing its audit report."
More than a year after the audit, Ligand announced that it would restate financials for 2003, recognizing approximately $59 million less in revenue from product sales than originally reported. The net loss was more than 2.5 times the net loss originally recognized that year.
Deloitte did not admit or deny the PCAOB's findings, but has made changes in its procedures. "As the order reflects, Deloitte, on its own initiative, established and implemented changes to its quality control policies and procedures that directly address the PCAOB's concerns," said a statement from the firm.
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