Audit Failures and Corporate Governance

This assignment delves into the world of audit failures and corporate governance, examining high-profile cases such as Adelphia's bankruptcy and Deloitte's $50 million settlement. It also explores the importance of accurate reporting, regulation, and auditor liability in preventing such failures. By analyzing these case studies, students can gain a deeper understanding of the complexities involved in maintaining sound corporate governance practices.

Audit, Assurance and
Compliance

Executive Summary
Deloitte & Touche LLP is UK private company limited by guarantee. It is one of the
UK's third largest accounting firm at multinational level.Adelphia Communications Corporation,
a cable television company with its headquarter in Coudersport, Pennsylvania. One of the fifth
largest cable company in the United States before filing of bankruptcy status in the year 2002.
The case is related to payment of big amount $50 million by Deloitte & Touche LLP because of
fraudulent bookkeeping practice made at Adelphia Communication Corporation. As per the
allegation made by Securities and Exchange Commission, Deloitte had failed to comply with all
the audit procedures and standards. The SEC has ordered Adelphia Communications Corporation
to make a payment of civil money penalty of around $25 million pay another $25 million as
compensation amount for the sake of Adelphia shareholders. The auditors of the company
Deloitte failed in complying with the provisions of GAAS and Deloitte paid $50 millions for
settling the case.

Table of Contents
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
1...................................................................................................................................................1
2...................................................................................................................................................1
3. Investigating and explaining the issues in Auditing and assurances which were raised in the
case..............................................................................................................................................1
4 Determining the root cause of the issues in the present case..................................................3
5. The mistakes or misrepresentations made by Deloitte resulting in warding of damages and
a judgement against the audit firm.............................................................................................3
6. Recommendations on the improvements of the audit strategy and the program....................4
CONCLUSION................................................................................................................................6
REFERENCES................................................................................................................................7

INTRODUCTION
Audit is an official inspection an organisation's account and presenting a picture of the
operations and performance of the company to its stakeholders for making a informed decision
over matters related with company. Assurance services are related with auditing which provides
independent, objective and assessment of financial statement. Compliance requirement defines
meeting all the regulatory and legal requirements while carrying out the auditing. In recent time
many of leading auditing firms have paid settlement amount for a cases in which they were
negligence in carrying out their work. In this context the preset report it presented while
discussing the case of Adelphia- Deloitte and Touche, 2005 where company paid a settlement
amount of $50 Millions. The report will includes key evens and facts of the case, with
presenting culpability, fine imposition, issues of auditing and assurance, root cause and mistakes,
misrepresentation made by Deloitte. Overall the report revolves around the case of adelphia-
Deloitte and Touche with providing recommendation for possible improvements in the audit
practices.
MAIN BODY
1. Description of key events and factual issues of case.
Deloitte & Touche LLP is UK private company limited by guarantee. It is one of the
UK's third largest accounting firm at multinational level. It is the largest professional service
network provider over the world in terms of revenue and number of professionals. The company
is providing service related to Tax, Audit, Management consulting, Financial & risk advisory
services and services related to legal aspects.
Adelphia Communications Corporation, a cable television company with its headquarter
in Coudersport, Pennsylvania. One of the fifth largest cable company in the United States before
filing of bankruptcy status in the year 2002 arises as a result of internal corruption (Deloitte
settles suit for $50 million- Adelphia case, 2019). Majority of revenue generating assets were
acquired by Time Warner Cable and Comcast as on July 31, 2006. Remaining part is auctioned
by LFC company, which is an internet based real estate marketing firm. After being acquired,
company remains in existence no more. Also, the long distance telephone business was sold to
Pioneer Telephone for around $1.2 million.
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The case is related to payment of big amount $50 million by Deloitte & Touche LLP
because of fraudulent bookkeeping practice made at Adelphia Communication Corporation. On
April 26, 2005 the Securities and Exchange Commission files a settlement action related to
payment of the civil money penalty against Deloitte & Touche LLP. Penalty has been charged
for committing of violation or for non compliance of Section 10A(a) of the Securities and
Exchange Act 1934 while conducting Audit of Adelphia Communications Corporation in the
year ended December 31, 2000.
As per the allegation made by Securities and Exchange Commission, Deloitte had failed
to comply with all the audit procedures and standards which are necessary for taking into
consideration at the time of conducting audit process in Adelphia Communications Corporation.
The accounting firm Deloitte has failed to comply with audit norms desgined so as to detect all
the illegal and unlawful business activities carried on by Adelphia.
Deloitte has been identified guilty of making non disclosure related to all the material
related party transactions and other related party transactions. Also, Adelphia doesn't fulfil the
criteria of presenting true picture of its financial statements. The main default made by company
is related to overstatement of equity by around $368 million and understated subsidiary debt by
$1.6 billion, make improper netted related party receivable and payables between all the related
parties and Adelphia (Deloitte settles suit for $50 million- Adelphia case, 2019). Also, company
has been found guilty and failed to make disclosure of extent of related party transactions.
Settlement -
The SEC has ordered Adelphia Communications Corporation to make a payment of civil
money penalty of around $25 million and disgorgement of $1 under the provision of Section
21(d)(3) of the Exchange Act so as to compensate victims of fraud and internal corruption made
by the company. This amount of $25 million will be deposited into a fund which will be used as
compensation amount for the benefit of Adelphia's shareholders. On the other hand, the
Commission has also censured, the accounting firm Deloitte for improper auditing work and
unprofessional code of conduct which ha to pay another $25 million as compensation amount for
the sake of Adelphia shareholders (Deloitte settles suit for $50 million- Adelphia case, 2019).
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2. Parties deemed responsible and why along with the penalties and consider whether they were
appropriate.
In given case scenario, Deloitte & Touche LLP and Adelphia Communications
Corporation both are in fault in their own place. Being an accounting firm, Delottie has to
comply with all the auditing and accounting standards, norms and regulations as applicable. But
it has failed to comply with professional code of conduct and material disclosure has also not
been identified by this accounting firm in respect of Adelphia Communications Corporation. It
has failed in complying with all the legal and auditing frameworks. Improper and failure of
Deloitte in using audit procedures has lead to non detection of significant and material
misstatements of Adelphia's Annual Report for the year 2000.
On the flip side, Adelphia Communications Corporation which is a cable television
company has also made fraud by understating the subsidiary debt amount by $1.6 billion and
overstating of equity amount by atleast $368 million (Deloitte settles suit for $50 million-
Adelphia case, 2019). Also, the company has improperly netted related party receivables and
payables between it and other related parties and failure has been made on part of non disclosing
the extent of related party transactions.
Penalty charges faced by both the defaulting parties includes a sum of approximately $25
million each. Deloitte and Adelphia has to pay a civil money penalty of around $50 million in
total which has been distributed in the fund made for restitution to Adelphia investors.
3. Investigating and explaining the issues in Auditing and assurances which were raised in the
case
Deloitte and Touche one among the 4 largest auditing firm in the world was providing
auditing and assurance services to the organisation Adelphia Communication which is a cable
television company. The client firm subsequently failed in its operation and lead to bankruptcy.
The audit firm Deloitte failed in detection of fraudulent bookkeeping by its client (Bishop,
2015). The main issues raised in this case were related with fraudulently excluding billions of
dollars in liabilities from consolidated financial statements of Adelhphia by hiding them on the
books of off-balance sheet affiliates, falsified operations statistics and inflated earnings to meet
Wall Street’s expectations; and concealment of rampant self dealing by the Rigas Family. Under
this case the audit firms failed severely in identification of any of the above mentioned issues.
Deliotte failed in complying with certain legal requirements which are:
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Generally accepted accounting principle:
The risk management program of Deloitte was established for clients which deemed to
have much greater than normal audit risk. As per the GAAS (Generally accepted Auditing
standard) requirement this risk management program was not required but was inherited by the
audit firm to mange the high-risk with client audit. With this risk assessment program the audit
firm recognised that its client Adelphia was among its highest risk client.
Deloitte failed to ensure that its client properly disclosed all its liabilities and
borrowings. The client firm took a co borrowing and the Deloitte failed in detecting the
fraudulent intention behind such loan and advances taken by the clients (Lieb, 2016). When the
audit firm founds out the mismanagement and improper recording of the transactions related
with co borrowing its client firm resisted and the Deloitte abandoned its attempt to make the
disclosure more accurate. Deloitee have identifies the issues of its Clint Adelphia's failure in
disclosing and recording its co borrowing on the balance sheet or otherwise disclose that a
portion has been excluded which was against the rules of GAAP. The auditors of the company
knew r must have known that this act of the client is in violation of GAAP and in this that failed
in complying with the provisions of GAAS.
Exchange act rules and provision:
In this case the Riga family who owned the firm Adelphia by holding maximum shares
in the company acquires $368 million shares of the firm and paid in immediate available funds.
The sections of the Exchange act which were violated by Adelphia were section 13 (a), 13 (b)(2)
(A), and 13 (b)(2(B). All this violations by the client firsm were not discovered by Deloitte
(Krishna Moorthy and Sarath, 2015). In facts the Rigas family paid nothing still the Adelphia
books the transaction as received for purchase of share. In this regard Deloitte allowed this
transaction as overstating the stock and equity by $368 million which enhanced the financial
position and picture of Adelphia.
Moreover, in the audit of 2000, the audit firm have identifies specifically 9 audit risks for
the client firm but it failed in meaningful assessment of whether those risks had been
appropriately addressed. Rather, Deloitte did a cursory review of the audit plan and the risk
factors and decided, with no further analysis, that the risk factors had been adequately addressed.
This failure to follow up on the enumerated risk factors resulted in Deloitte’s oversight of
numerous red flags described above that indicated the existence of Adelphia’s fraud (Case
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Studies in Audit Failures, 2019). Along with this the Delitte failed in netting the related party
payable and receivable for Adelphia.
4 Determining the root cause of the issues in the present case
In 2000, the company Adelphia file for bankruptcy , it was then, when the dysregulation
and all the fraud of the company came it limelight. In this regard the client firm have filed law
suit against its auditors a that is have defrauded the transaction along with the cable company.
The client firm was engaged in such practices where GAAP and Exchange act provision were
deliberately violated. Under certain circumstances the the auditors of Deloitte came to such facts
but till now they have turned a blind eye towards misconduct and high risk client. This made
the fraud of high magnitude go undetected (Moorthy and Sarath, 2015). Deloitte and Touche
was under improper professional conduct where it failed in detecting the fraud when it reviewed
the Adelphis's book for the fiscal year 2000. The root cause of this default made by the Deloitte
is that it have trusted its client far too much where it ignored the facts and evidence on the the
face of the financial statement which were screaming out over the faults and misrepresentation
made by the Rigas family in the balance sheet of the firm.
Furthermore the audit firm Deloitte was under fault of non abidance with the rules and
provision of GAAS where it is required to detect any fraudulent activity under taken by the
client and and misappropriation of the legal requirements such as GAAP. The auditors of
Delioitte founds out that Client firm was not following the provision of GAAP and also acting
against the GAAP, still they ignored it when the questing was opposed by the client firm
(Deloitte Settles Adelphia Audit Case for $50 Million, 2019). The engagement team's failure in
object of these particular misstatement permitted Adelphia to engage in certain accounting
practices that departed from GAAP, rhis ead that the violations caused by Adelphis was caused
due to the action of Deloitte. Deloitte failed to use auditing procedures designed to detect illegal
practices like Adelphia's. With this it can be stated that the actions of the engagement team of
Deloitte made this fraud possible, have they taken action on time the fraud would have came to
limelight at that time only and all the fraudulent activities would have been crubbed.
5. The mistakes or misrepresentations made by Deloitte resulting in warding of damages and a
judgement against the audit firm
The cable company filed for bankruptcy in 2002 and the defaults and fraud was detected
to some extent in 2000 only. The audit firms are imposed with a duty to analyse the financial
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statement of organisation to see all the legal compliance and present of true and actual facts in
financial statement of the company. In the present case the biggest made by the engagement
team of Deloitte was that it knowingly ignored the fraudulent actions of its client Adelphia. The
non disclosure of the co borrowings on the balance sheet was identified in the fiscal year 2000
and for the same no action was taken by the audit firm. This lead the Security exchange
commission to file a lawsuit against Deloitte (Deloitte to Pay $50 Million to Settle Adelphia
Case, 2019) The allegation imposed by SEC that the firm failed to detect massive fraud
perpetrated by Adelphia and certain members of Rigas Family in he audit of income year 2000.
This claimed were founds to be true and in this regard Deloitte paid $50 millions for settling the
case and they did come to the settlement without admitting or denying wrongdoing on its part.
6. Recommendations on the improvements of the audit strategy and the program
With reference to the fraud made by the Deloitte and touch relating to the fraudulent
activity in the auditing, various measures can be taken by the company to improve its strategy in
terms of audit which in turn leads in the prevention of its reputation and avoid litigation in the
future.
The major strategies that the company must follow are-
Accurate processing- An auditor must plan for the processes that is to be adopted for
making the auditing so that step by step the practices can be analyzed which leads to accuracy in
the processing (Brown, and et.al., (2016)). This accuracy in turn helps in improving the audit
quality.
Complying with the policies and the procedures- Deloitte and touch, while continuing
the audit must throw an utmost care towards the standards and the procedures of the auditing that
are provided by the IFRS and other standards. An accounting firm must ensure that the auditing
is done with compliance of all the rules so that quality and the program of the audit can be
improved with quality.
Safeguarding against the risk of fraud- Deloitte must take appropriate measures for
safeguarding the interest of the investors and the shareholders by creating the true and fair view
of the guidelines. This leads to an improvement in the quality of the audit and also the risk can be
mitigate effectively by detecting the fraud.
Determining operational risks and application of the information system for
controlling- with the use of the data security and IT controls systems, auditor could evaluate the
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technical controls for assessing the potential data of the Adelphia by focusing on the security
concerns (Gaddie and et.al., (2019, April)). This act as the most effective measure for mitigating
the risk and enhance the quality of the audit processing.
Fair view- An auditing firm must make an audit by focusing on the fair view principle of
the audit process which develops the auditing with more accuracy and true assessment could be
ascertained. Therefore, an auditor must look for the fair view of the reporting which improves
the process, control, risk and the performance of the measurement and also eliminates the
existence of the fraud by adequately mitigating the risk.
Reviewing- By reviewing the highly risky areas, Deloitte can gain the quality control in
the performance of the audit. After the preparation of the final audit, the company must seek for
reviewing the audit made for reporting the relevant results. This helps an accounting firm in
making the improvements in the processes of the audit and in protecting the risk of the users
against the company.
Developing the guidance – An accounting firm must develop for the accounting
guidance in relation to the industry for which it is forming the audit. The guidance must reflect
the fairness and the integrity regarding the financial statements of the firm (Pouzi and et.al.,
(2018, August)). This is also an effective measure that facilitates prevention from indulging in
any fraudulent activities and also protects in the involvement of litigation in the probable future.
Thus, these measures makes the auditing processes more efficient and leads to
improvement in the reporting of the financial results to the internal and the external users.
According to the case, the accounting firm that is Deloitte should have to focus on these points
so that its reputation does not get affected and it could have not involved in the fraudulent
activity. Improved auditing helps the organization in getting the ongoing review of the
performance which in turn helps in determining the mistakes and the changes that occurred over
the years. Through the auditing the staff within the enterprise remains active and seeks for less
mistake as they are feared about being caught by auditor. Effecting auditing enables in reducing
the risk in context of the fraud and facilitates provisions of the advice that contains financial
benefits for the business. Auditing that aims for inculcating the reliability and the credibility in
the figures is been considered as the most effective strategy and results in overcoming the
loopholes present in the firm. The goodwill and the credit rating of the company highly depends
upon the comments that have been assigned by the auditor on the reports.
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CONCLUSION
From the above report it can be concluded that the audit, assurance and compliance
define the exact and clear picture of financial performance of company. The duty is imposed on
the auditors to determine the fact and actual position of the firm. For the case of Adelphia-
Deloitte and Touche it has been identifies that the client firm Adelphia was under fault of
misrepresentation of the fact related with co borrowing and exuding liability form the balance
sheet. In this regard it has been identifies that Deloiitte sometimes deliberately ignored the facts
and relied blindly on the client. This lead to the bankruptcy of the client firm. The audit firm
was found guilty of provision of GASS and exchange rules act. For this default the firm was
imposed with a fine of $50 millions for which a case was imposed on its by the security
exchange commission.
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REFERENCES
Books and Journals
Bishop, S., 2015. Adelphia: An Exploratory Case Study of Corporate Culture and Ethical
Judgment.
Brown, B. and et.al., (2016). Interface design recommendations for computerised clinical audit
and feedback: hybrid usability evidence from a research-led system. International Journal
of Medical Informatics. 94. 191-206.
Deloitte settles suit for $50 million- Adelphia case. 2019. [Online]. Available through:
<https://www.baltimoresun.com/news/bs-xpm-2005-04-27-0504270322-story.html>.
Gaddie, J. and et.al., (2019, April). Management of women on Dolutegravir: an audit against
2018 BHIVA recommendations on prescribing in women of reproductive age. In HIV
MEDICINE (Vol. 20. pp. 32-32). 111 RIVER ST, HOBOKEN 07030-5774, NJ USA:
WILEY.
Krishna Moorthy, L. and Sarath, B., 2015. Regulation, Auditor Litigation and Settlements.
Lieb, A., 2016. Related Parties: Audit Risk When 63 Entities Act as One.
Moorthy, L.K. and Sarath, B., 2015. Regulation, Auditor Litigation and Settlements.
Pouzi, A. and et.al., (2018, August). Quality improvement study of extended venous
thromboembolism prophylaxis compliance after colorectal cancer surgery. In BRITISH
JOURNAL OF SURGERY (Vol. 105. pp. 106-106). 111 RIVER ST, HOBOKEN 07030-
5774, NJ USA: WILEY.
Online
Deloitte to Pay $50 Million to Settle Adelphia Case. 2019. [Online]. Available
through<https://www.nytimes.com/2005/04/26/business/deloitte-to-pay-50-million-to-
settle-adelphia-case.html>.
Deloitte Settles Adelphia Audit Case for $50 Million. 2019. [Online]. Available
through<https://www.latimes.com/archives/la-xpm-2005-apr-27-fi-deloitte27-story.html>.
Case Studies in Audit Failures. 2019. [Online]. Available
through<https://shodhganga.inflibnet.ac.in/bitstream/10603/156798/11/11_chapter
%206.pdf>.
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