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SEC Fines Audit Firm for Independence Violations

The SEC yesterday fined Deloitte & Touche after concluding that a business relationship between a consulting affiliate of the auditor and a trustee of three of the firm’s fund audit clients resulted in a loss of the auditor’s independence. In the same matter, the SEC fined the funds’ administrator, which had contractually agreed to run the funds’ compliance programs, for causing the fund’s to violate rule 38a-1 by not adequately screening directors’ business relationships.

In its order, the SEC states that while the firm served as the auditor for three registered closed-end funds, its affiliate, Deloitte Consulting, maintained a business relationship a trustee on the audit committee of the three funds. The relationship began with a 2006 deal in which Deloitte Consulting purchased intellectual property from the trustee and the trustee agreed to serve as a paid consultant for the company for a period of three years. The trustee continued consulting, albeit on an infrequent basis, until 2011. The consulting work included training Deloitte & Touche personnel on at least one occasion.

As described in the SEC’s order, Deloitte & Touche failed to perform an independence consultation as required by its own policies prior to entering a business relationship with the trustee. Indeed, the firm did not discover the problem until five years later when, as part of an effort to enhance its independence quality controls, it noticed a payment from its consulting affiliate to the trustee. As a result of this failure, Deloitte & Touche did not discover that it was no longer independent with respect to the funds, thus rendering its claim of independence in its annual audit reports incorrect.

The SEC also charged that the administrator caused the funds to violate Rule 38a-1 because the funds did not have adequate policies and procedures with respect to auditor selection and retention. The funds’ administrator was contractually obligated to discharge the funds’ responsibilities under Rule 38a-1 to comply with the securities laws.   While the administrator did distribute and collect a trustee and officer questionnaire that asked about respondents’ “principal occupation(s) and other positions” and “any ‘direct or material indirect business relationship’” with Deloitte & Touche, the questionnaires did not explicitly cover business relationships with the auditor’s affiliates. The trustee apparently did not disclose his business relationship with Deloitte Consulting because the affiliate was a separate legal entity. However, according to the order, the trustee never inquired about whether his consulting relationship might compromise auditor independence, even though he provided training directly to Deloitte & Touche personnel.

To settle the charges, Deloitte & Touche agreed to disgorge audit fees of $497,438 plus interest, and pay a fine of $500,000. The administrator will pay a $45,000 penalty, and the trustee will disgorge $30,000 plus interest and a fine of $25,000.