Thursday, February 06, 2014

Revisiting the Financial Crisis: Why Did Federal Reserve of New York Resign Deloitte?

In February of 2007, the Federal Reserve of New York board extended the contract of international auditing company Deloitte Touche Tohmatsu Limited. Future Treasury Secretary Tim Geithner was President of the New York Fed at the time.

This is from a highly redacted press release of the yearly minute of Fed of New York meetings that I posted yesterday
Ms. Considine, Chair of the Audit Committee, reported that the Audit Committee had reviewed and approved the Reports of Audit Activities (# ) at the Bank during December 2006 and January 2007. Ms. Considine stated that the Committee had approved a request by the Bank’s Chief Compliance Officer to maintain an existing contract with Deloitte & Touche to provide consulting services related to the establishment of the Bank’s Compliance program after Deloitte & Touche becomes the Bank’s external auditor. She observed that the Bank’s control environment continued to be satisfactory, that no unfavorable audit opinions had been issued, and that the Bank’s Sarbanes-Oxley work was on track. She reported that the qualifications of the Audit Committee members had been reviewed and that Mr. Wait was designated as the Committee’s financial expert. Ms. Considine noted that the Committee also received presentations on the Bank’s Quarterly Operations performance and the Bank’s Ethics Program before going into a series of Executive Sessions, from which there were no issues that required the attention of the full Board of Directors.

I quick review of Deloitte on Wikipedia finds that the auditing agency has a history of incompetence and accusations of auditing fraud.

Adelphia Communications Corp. cable television company. The comany filed for Chapter 11 bankruptcy in 2002. Founder John Rigas and his son Timothy Rigas were convicted on 15 counts securities fraud.

The Rigases and Mulcahey were charged with hiding $2.3 billion in debt at the cable company, deceiving investors and stealing company cash to line their own pockets.

The children of John Rigases spent money lavishly on their lifestyle and personal projects. The Rigases family was moving money out of Adelphia and into other family owned businesses. The auditing company that was helping hide the money was Deloitte. The Securities and Exchange Commission settled with Deloitte for a $50 million fine. Deloitte's accounting on Adelphia was less than stellar.

Deloitte ran into problems in China in 2006. The China Securities Regulatory Commission and investors.

A source close to the China Securities Regulatory Commission (CSRC) revealed that it would likely hold an administrative hearing on April 7 to investigate the firm's role in a 2005 scandal involving Chinese refrigerator maker Guangdong Kelon Electrical Holdings Co, a former Deloitte client.

At the same time, a lawsuit was brought to Huangpu District Court in Shanghai on Wednesday, claiming Kelon investors had suffered losses because Deloitte issued unqualified financial reports while auditing Kelon's finances in 2004.

If the accusation is accepted next week, Deloitte will face trouble from both the court and the industry regulator.

In 2011, Deloitte was accused of fraud from short sellers in China. Forbes reports that the scandal made Deloitte resign from their services to Boshiwa International, Daqing Dairy, China Media Express and Longtop Financial.

With over 150 years of history and a truly global presence, Deloitte is arguably the most confidence-inspiring and relied-upon auditor in the world. However, Deloitte’s booming business in China has created significant headaches for Deloitte’s global brand. After an aggressive push into China, Deloitte now boasts more Hong Kong- and U.S.-listed Chinese public clients than any other auditor. But Deloitte was also the auditor of record for some of China’s biggest fraud implosions. With both China Media Express and Longtop Financial, many investors felt that the Deloitte stamp of approval on prior years’ financial statements meant that substantial fraud was a near impossibility. Deloitte’s abrupt resignation from both companies following short-seller accusations of fraud made the financial losses for investors that much more painful to accept.
Since the 2007 Federal Reserve of New York resigning Deloitte the auditing agency has been accused of fraud on numerous occasions. The most serious is the New York state Department of Financial Services claiming that Deliotte helped Standard Chartered money launder for Iran.

The DFS said that one senior Deloitte partner admitted that he “watered down” a report compiled for the regulator because the situation was too politically charged.

The New York regulator also claimed that in 2005 Deloitte “unlawfully” gave the British bank confidential reports that it had prepared for two other foreign banks, also under investigation for money-laundering activities.

Deliotte does more than just basic accounting. I wonder what kind of financial reports did Deliotte (if any) did they do for the Fed of New York before the financial crisis of 2008. Looking back it seems like poor judgement for Tim Geithner to retain the services of Deliotte.

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