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State Board Report

December 2016

The Public Company Accounting Oversight Board announced two settlements against members of the Deloitte Global network on December 5: A civil penalty of $8,000,000 was imposed on Deloitte Brazil (Deloitte Touche Tohmatsu Auditores Independentes) and of $750,000 on Deloitte Mexico (Galaz, Yamazaki, Ruiz Urquiza, S.C.). Claudius B. Modesti, director of the PCAOB’s Division of Enforcement and Investigations, commented about the Deloitte Brazil case: “The orders released today detail some of the most serious misconduct the PCAOB has ever uncovered.”

The PCAOB’s inspectors found Deloitte Brazil had knowingly issued a materially false audit report for the 2010 financial statements and internal control over financial reporting of Gol Linhas Aédreas Inteligentes S.A. (a Brazilian airlines). The engagement partner directed junior personnel to alter work papers from the 2010 audit to conceal known audit deficiencies from the PCAOB inspectors. The altered work papers along with other misleading information were presented to the PCAOB inspectors by Deloitte Brazil. In attempting to obstruct the PCAOB’s investigations, multiple firm partners provided false testimony and made false representations to the PCAOB’s staff about the 2010 audit.

Besides agreeing to the civil penalty, Deloitte Brazil agreed to sanctions including: censure, measures to improve the firm’s quality control system, appointment of an independent monitor to assess the firm’s achieving remedial benchmarks, immediate practice limitations and additional continuing professional education and training for the firm’s audit staff. All but one of a dozen former Deloitte Brazil partners and other audit personnel who were involved in the case were barred or suspended from associating with a registered public accounting firm. The PCAOB gave credit to one senior manager on the audit who reported to the PCAOB staff that senior firm management was obstructing their investigation.

Deloitte Brazil performs audits on approximately seven issuers, as defined in Section 2(a)(2) of the Securities Act, and participates in audits led by accounting firms for approximately 60 other issuers, including other members of Deloitte Global, the PCAOB reports.

Deloitte Mexico had failed to implement quality control policies and procedures for audit documentation, the PCAOB announced. Two former Deloitte Mexico partners and another former auditor were sanctioned for violations including audit deficiencies and improper alteration of work papers in the 2010 audit of a U.S.-based mining company. Mr. Modesti commented: “By failing to prevent repeated late archiving of its audit documentation over many years, Deloitte Mexico undermined its own quality control system and increased the risk that work papers might be improperly altered.” Deloitte Mexico serves approximately six issuer audit clients and plays a role in approximately nine audits of other issuers, the PCAOB reports.

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