PCAOB Issues Disciplinary Orders Against Deloitte & Touche LLP and a Former Audit Partner

The Public Company Accounting Oversight Board today issued Orders instituting disciplinary proceedings against Deloitte & Touche LLP and a former Deloitte audit partner, James L. Fazio, CPA, for violations of the Board’s interim auditing standards in connection with the firm’s 2003 audit for Ligand Pharmaceuticals Incorporated.

Without admitting or denying the Board’s findings, Deloitte consented to an order imposing a $1 million civil money penalty. As described in the order, Deloitte has implemented changes to its quality control policies and procedures for identifying and addressing potential audit quality concerns regarding the performance and deployment of its audit partners. The order requires Deloitte to undertake certain documentation practices relating to these additional quality control policies and procedures. The firm also was censured.

Mr. Fazio, consented to an Order barring him from being an associated person of a public accounting firm that is registered with the PCAOB. After two years from the date of the order, Mr. Fazio may file a petition for Board consent to associate with a registered public accounting firm.

“Our enforcement program is vital for assuring that public confidence is not undermined by firms or individual audit professionals who fail to meet the profession’s high standards of quality and competence,” said Mark W. Olson, PCAOB Chairman.

“The Board’s orders against Deloitte and Mr. Fazio are important examples of holding the audit profession accountable to those standards to protect the investing public. I commend the Board’s enforcement staff for the rigor and diligence it brought to this complex case,” he added.

Claudius B. Modesti, Director of the Division of Enforcement and Investigations, stated: “Registered public accounting firms must take reasonable steps to assure that their audit partners and other audit professionals are competent to conduct public audits. When concerns about an auditor’s competency arise, a firm must act with dispatch to protect audit quality. The firm failed to meet the Board’s auditing standards in the audit led by Mr. Fazio.”

In its orders, the Board found that Deloitte assigned Mr. Fazio to serve as the engagement partner for its audit of Ligand’s 2003 financial statements. The Board also found that Deloitte assessed the engagement risk of the 2003 audit as greater than normal. The Board found that during the audit, Mr. Fazio failed to perform appropriate and adequate audit procedures related to Ligand’s reported revenue from sales of products for which a right of return existed and failed to supervise others adequately to ensure the performance of such procedures. Mr. Fazio neither performed nor ensured the performance of procedures that adequately took into account the existence of factors indicating that Ligand’s ability to make reasonable estimates of product returns may have been impaired.

Moreover, in evaluating the reasonableness of Ligand’s estimates of future returns, Mr. Fazio neither performed nor ensured the performance of procedures that adequately took into account the extent to which Ligand had consistently and substantially underestimated its product returns. In auditing Ligand’s reported revenue, Mr. Fazio failed to evaluate these factors with the due care and professional skepticism required under the circumstances. He also failed to identify and appropriately address issues concerning Ligand’s policy of excluding certain types of returns from its estimates of future returns and the adequacy of Ligand’s disclosure of this accounting policy.

In the Deloitte order, the Board found that, before Deloitte issued its audit report, firm management was aware of facts and circumstances that raised questions about Mr. Fazio's ability to lead public company audit engagements. Certain members of Deloitte’s management concluded first that Mr. Fazio should be removed from public company audits and ultimately that he should be asked to resign from the firm. Yet the firm left Mr. Fazio in place as the engagement partner and did not take meaningful steps to assure the quality of the audit work before issuing its audit report.

More than a year after the 2003 Ligand audit, Ligand announced that it would restate its financial statements for 2003 and other periods because its recognition of revenue from product sales upon shipment was not in accordance with GAAP. In its restatement, Ligand recognized approximately $59 million less in revenues from product sales than originally reported (a decrease of approximately 52 percent) and reported a net loss more than 2.5 times the net loss originally recognized in that year.

The Board acknowledges the assistance of the Los Angeles Regional Office of the U.S. Securities and Exchange Commission.

The Board’s orders are available on its Web site (www.pcaobus.org) under Disciplinary Proceedings.

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