PCAOB Announces $750,000 Settlement with Deloitte Mexico for Failing to Effectively Implement Quality Control Policies and Procedures for Audit Documentation

Three individuals also were sanctioned for violations including improperly altering work papers

WASHINGTON, Dec. 5, 2016

The Public Company Accounting Oversight Board today announced that Mexico-based Galaz, Yamazaki, Ruiz Urquiza, S.C. (Deloitte Mexico) was censured and will pay a $750,000 civil penalty for failing to effectively implement quality control policies and procedures for audit documentation.

Two former Deloitte Mexico partners and another former auditor also were sanctioned for violations including audit deficiencies and improper alteration of work papers on a 2010 audit of a large U.S.-based mining company.

From 2011 to 2015, Deloitte Mexico failed to archive audit documentation of numerous public company audits within 45 days of the audit report release date in violation of Auditing Standard No. 3, Audit Documentation. The firm also violated PCAOB quality control standards by failing to effectively implement policies and procedures to ensure the timely archiving of audit documentation by its engagement teams.

"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," said Claudius B. Modesti, director of the PCAOB Division of Enforcement and Investigations.

After the 2010 audit, the three individuals sanctioned — the engagement partner, a second partner, and another auditor on the engagement team — participated in the deletion and improper alteration of the archived audit documentation in advance of an internal audit practice review conducted as part of the firm's system of quality control.

The two partners then made available the improperly altered work papers to PCAOB staff during an inspection. During a subsequent PCAOB investigation, the engagement partner once again made available to PCAOB staff the improperly altered documents, as well as other misleading information.

"As these orders against the individuals demonstrate, the Board has zero tolerance for improper alteration of audit documentation in connection with a PCAOB inspection or investigation," said Director Modesti.

The engagement partner for the 2010 audit also violated PCAOB rules and standards by failing to exercise due professional care and skepticism and failing to obtain sufficient audit evidence in several significant areas.

Specifically, he failed to obtain sufficient evidence to support the company's tax treatment of unremitted earnings of a foreign subsidiary, perform sufficient procedures to test journal entries for the existence of fraud, and perform necessary procedures regarding the specialists used on the audit.

The sanctioned individuals are listed below. They are no longer associated with Deloitte Mexico.

In addition to the censure and $750,000 civil penalty, Deloitte Mexico agreed to undertake significant remedial measures designed to prevent future violations of AS No. 3.

All of the respondents neither admitted nor denied the allegations contained in their respective orders.

The investigation that uncovered the misconduct and resulted in the settlements announced today originated with information obtained through the PCAOB inspection program. PCAOB enforcement staff members Bernard McDonough, James Welch, Carol Der Garry, and Hazel Mak conducted the investigation, which was supervised by William Ryan and Marion Koenigs.

The PCAOB oversees auditors' compliance with the Sarbanes-Oxley Act, professional standards, and PCAOB and Securities and Exchange Commission rules. Further information about the PCAOB Division of Enforcement and Investigations may be found on the PCAOB website. Firms or individuals wishing to report suspected misconduct by auditors, or to self-report possible misconduct, may do so using the PCAOB Tip & Referral Center.