Holmes Institute Audit and Compliance: Deloitte-Navistar Case Study

This report provides a critical analysis of the settlement between Deloitte & Touche and Navistar International Corporation. It identifies the key issues and root causes of the case, focusing on Deloitte's liability for Navistar's accounting irregularities and the resulting fines and reputational damage. T...Read More

AUDIT ASSURANCE AND COMPLIANCE
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Executive summary
 This paper offers a critical analysis of the settlement between Deloitte and touche
and the Navistar international corporation to identify the key issues and causes of
the case and presenting possible interventions.
 Over the course of the investigation, deloitte was found liable for Navistar's
accounting irregularities and subjected to a number of fines by regulatory authorities
such as the public company accounting oversight board (Laing & Hoy, 2018 16:1).
 The accounting firm also had its stock momentarily de-listed.
 Though Navistar's management was found partly responsible for the scandal.
 The details unearthed throughout the court proceedings point to a weak
organizational culture within Deloitte and touche characterized by non-compliance
with federal standards and ethical codes of conduct (Rubasundram, 2015 p.102-106).
 In consideration of the fact that most of the big accounting firms have been involved
in similar scandals, it is proposed that audit firms provide more training for their
partners and adopt more effective practices to protect the reputation of their trade.

Introduction
 In 2005, Deloitte & touché, the United States' largest accounting company, was investigated by federal authorities over a series of audits
of the Navistar international corporation carried out between 2003 and 2005.
 In a two page order, the public company accounting oversight board stated that Navistar failed to adhere to a minimum of five auditing
guidelines.
 The formalized investigation was the first to emerge involving one of the big four accounting bodies from the regulatory body's inception
by the Sarbanes Oxley act of 2002.
 This paper will evaluate the root causes and fundamental issues involved in the settlement between Deloitte and Navistar and identify the
measures that might be employed to limit the chances of litigation and ensure professional reputation and integrity.
 In recent years, the increasing cost of litigation settlements for the four leading audit companies has grown to billions of dollars (Lennox &
Pittman, 2010 p209-247).
 Auditor liability is a growing problem, both in terms of the reputation and quality of the profession.
 Auditors must implement the highest ethical and practice standards to restore the image of their business and retain the confidence of
their clients.
 Key events
 Navistar International Corporation previously known as International Harvester Company is a holding company based in America that
maintains ownership over the manufacturer of IC school buses, international brand commercial trucks and workhorse branded chassis for
step vans and motor homes.
 The manufacturer creates private label designs for diesel engines for the Suburban utility, pickup truck and van markets.
 The manufacturer also provides diesel engine parts and service. Navistar's headquarters are in Leslie, Illinois, and it makes average annual
revenue of about 9 billion U.S dollars.
 At the beginning of 2006, the company announced that it would not send its yearly 10-K report to the United States Securities and
Exchange Commission within the stipulated period. The delay was the result of a dispute with its auditors; Deloitte and Touché, over
complex accounting challenges (Grothe & Weirich, 2007 p.14).
 Navistar later cut ties with Deloitte, its independent auditor for nearly a century, and employed KPMG to assist in the restatement of
revenues as far back as 2002 to rectify accounting irregularities.
 Toward the end of 2006, the company's executives announced another extension to the reformulation of previous earnings and financial
report for that year. The announcement led the New York Stock Exchange to announce that it would delist the company, after almost a
century of trading (Thomsen, 2014 p.793-833) (Sweeney & Vallario, 2002 p.51).

Relevant issues raised by the case and root causes
 Though Deloitte is not the only party at fault, in this case, the facts revealed suggest that the
auditing firm suffers an inconsistent organizational culture.
 Even after admitting liability in its case with Navistar, Deloitte was later disciplined and forced to
pay a 2 million fine by the PCAOB in 2013 when it allowed Christopher E. Anderson, a former
partner who was under suspension, to continue work in the capacity of an associate.
 Anderson worked on Deloitte's engagement with Navistar in Chicago and was the first individual
to be suspended and fined by the PCAOB for consenting without quantifiable basis to accounting
decisions by the Navistar financial department in 2003
 It resulted in restatements, delisting, Securities and Exchange Commission investigations and
various lawsuits including one by Navistar against Deloitte (Gilbertson, D.L. and Herron, 2009
p.A15-A34).
 This suit was eventually settled on a confidential basis. Anderson is just one of many partners
culpable for substantial audit irregularities which have found refuge in Deloitte.
 Nicholas Difazio was suspended in 2008 by the Securities and Exchange Commission and
suspended from accounting practice for three years for his involvement as a partner in the Delphi
audit scandal.
 Even before the Securities and Exchange Commission reinstated him, Difazio resumed work for
Deloitte and also led the firm's IFRS division.
 In 2008, during the investigation into Navistar's allegations against deloitte, the company had
already been fined 50 million dollars for its failure to detect fraud at the Adelphia communications
corporation.
 This is the most significant penalty that the Securities and Exchange Commission has ever
imposed on an accounting agency.

Deloitte’s mistakes
 Even if the defendant had found an indeed disputed question concerning
the interpretation of any specific PCAOB standard of audits, ascertaining
whether Deloitte violated those standards would not be based on
questions of law but also on actual and situation particular application of
those standards to specific aspects Deloitte extensive work for Navistar.
 Grable's jurisdictive approach is not entirely applicable for jurisdiction as
well.
 The matter of whether the defendant correctly adhered to the guidelines
established by the federal government was a fact-specific inquiry.
 Unlike in Grable, there didn’t seem to be any legal disagreement on the
interpretation of these statutes but merely a factual argument over
whether they were overlooked.
 Even with these two obstacles ignored, admitting jurisdiction only
because the court must adhere to PCAOB audit standards would
constitute a significant upset to the congressional affirmation of balance
of state and federal administrative responsibilities.
 The fact that Sarbanes Oxley does not institute a private right of action to
implement PCAOB audit standards while not judging against jurisdiction
stood to its disadvantage.

Conclusion
 How audits are executed must grow from the search for irregularities to include the assessment of the effectiveness of
specific processes. In a process-based review, officials first identify efficiency problems as avenues for improvement.
 For instance, if an audit identifies an opportunity for growth that involves time to market in the process of design and
development, the management review process may deal with this issue by creating a new requirement, a target
timeline.
 Subsequent audits will then ascertain whether the development and design process has been effective in reaching the
objective. Process effectiveness assessment reports similar to the methodology implemented by rhea international
aerospace quality group.
 The process effectiveness assessment reports provide a structured layout for the verification of the effectiveness of
the processes in the achievement of the predetermined objectives.
 Internal and lead auditor training initiatives are essential because they improve participants' knowledge of the
fundamentals of auditing practice and ethical standards (Banerjee et al., 2015).
 These programs help ensure that auditors are adequately prepared to achieve, through experience, the necessary
level of skill essential for conformance based audits.
 The degree to which advanced training is required varies following the complexity and nature of the institution. For
instance, the pre-requisites for health care industries are different from those in financial service or aerospace
settings.
 As a starting point, auditors must possess sufficient knowledge on the use of quality control and statistical tools that
constitute the standard auditor certification.