Settlement calls for $50 million
NEW YORK — The Securities and Exchange Commission cleaned up more of the Adelphia mess Tuesday, announcing that Deloitte & Touche will pay $50 million to settle charges that it turned “a blind eye” to the massive fraud scandal engulfing Adelphia when auditing the company’s books in 2000.
Settlement — the largest on record for an accounting firm — comes one day after the SEC announced a complex settlement that calls for Adelphia to pay $715 million and the founding Rigas family to turn over a record $1.5 billion in assets.
In the parallel criminal case, founder John Rigas and his son Timothy are scheduled for sentencing next month in federal court after being convicted of bank fraud, securities fraud and conspiracy. Another son, Michael Rigas, was acquitted.
SEC came down hard on Deloitte in its order, saying the Big Four accounting firm engaged in improper professional conduct and caused Adelphia to violate record-keeping provisions of securities law by failing to detect the fraud perpetrated by members of the Rigas family.
Financial watchdog also filed a complaint in federal court alleging that Deloitte failed to implement audit procedures designed to detect its client was engaging in illegal acts, even though firm had flagged Adelphia as a high-risk client.
Deloitte agreed to the settlement without admitting or denying the findings of the SEC order or federal court complaint.
“What is especially troubling here is that Deloitte recognized the risk of fraud posed by this client at the outset. When auditors turn a blind eye toward misconduct on a high-risk client and allow a fraud of this magnitude to go undetected, the consequences will be severe,” said SEC Northeast regional office director Mark Schonfeld. As a result, Deloitte’s audit contained an unqualified opinion on Adelphia’s financial statements for 2000.
In fact, Deloitte should have known that Adelphia failed to disclose that it had improperly excluded $1.6 billion in debt from its balance sheet; failed to disclose significant party transactions; and overstated its shareholders’ equity by $375 million, according to the SEC.
Under the terms of the settlement, Deloitte also has agreed to institute more controls when conducting audits for high-risk clients.
Deloitte will pay $25 million to settle the administrative proceeding and $25 million to settle the federal court action. The entire amount will be deposited in a new fund for victims of the Adelphia fraud.
The $715 million Adelphia settlement also will go to the fund, jointly administered by the SEC and Justice Dept.
Resolution of the SEC’s exhaustive investigation of the Rigas family saga helps to clear the way for Time Warner Cable and Comcast to seal their $17.6 billion bid to buy Adelphia, which filed for bankruptcy after the Rigases were arrested.