PCAOB Sanctions Deloitte Mexico Partners for Deficiencies and Misrepresentations in Audit of Mexican Subsidiary

Three partners barred, fined, and censured

Washington, D.C., Oct. 31, 2018

The Public Company Accounting Oversight Board today announced that it barred, fined, and censured three Deloitte Mexico partners for deficient work in auditing the Mexican subsidiary of a U.S. public company, as well as for misrepresentations about that work to the principal auditor, Deloitte U.S., which relied upon the work in issuing two audit reports.

The PCAOB sanctioned three partners at the Deloitte affiliate firm in Mexico -- Galaz, Yamazaki, Ruiz Urquiza, S.C., known as Deloitte Mexico — for failing to appropriately evaluate the 2013 and 2014 loan reserves of Prestaciones Finmart, then a Mexican subsidiary of Texas-based EZCORP, Inc.

Ricardo Agustín García Chagoyán, José Ignacio Valle Aparicio, and Rubén Eduardo Guerrero Cervera (who was a manager at the time) also failed to evaluate the operating effectiveness of certain internal controls over financial reporting (ICFR) at Finmart, but misrepresented to Deloitte U.S. that they had done so.

“The quality of cross-border audits depends significantly on auditors of subsidiaries adhering to their commitments to comply with PCAOB standards,” said PCAOB Acting Director of Enforcement and Investigations Mark Adler. “Today’s order makes clear that, when auditors fail to live up to those commitments and put investors at risk, the Board will take appropriate action.”

The auditors settled with the PCAOB without admitting or denying the findings. They consented to the terms and penalties of the disciplinary order, which barred them from being associated persons of a registered public accounting firm for a minimum of two years, and imposed money penalties of $50,000 each on García and Valle, and $30,000 on Guerrero.

“The three Deloitte Mexico partners sanctioned today not only failed to perform appropriate procedures in a critical audit area, but also compounded their failures by telling the principal auditor that they had done work that they, in fact, had not done,” said Director Adler. “That sort of misconduct warrants the significant sanctions imposed today.”

EZCORP at the time was a loan provider with operations in several countries including the U.S. and Mexico. Finmart, then its largest subsidiary, was a payroll-withholding lender.

In 2015, EZCORP filed restated financial statements for fiscal years 2012, 2013, and 2014, due in part to Finmart’s misclassification of certain loans. That misclassification caused Finmart to understate its loan reserve and loan bad debt expense. García, Valle, and Guerrero failed to perform any testing of Finmart’s loan classification and, instead, took for granted the accuracy of Finmart’s information.

EZCORP also disclosed that it had failed to maintain effective ICFR during that time period, and failed to recognize the extent of nonperforming loans at Finmart due to control deficiencies.

The PCAOB investigation was conducted by George Choundas, Stephen D’Angelo, Ramon Torres, and Noah Berlin, with the assistance of Thomas Barry and Hazel Mak. The investigative team was supervised by Ian Anderson 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 is available on the PCAOB website. Firms or individuals wishing to report suspected misconduct by auditors, or to self-report possible misconduct, may use the PCAOB Tip & Referral Center.