Caratulas

The Adelphia settlement is pretty much old news by now, but an acquaintance pointed out to me that there were some pretty unique aspects to the settlement that sure didn’t receive much press coverage. Or maybe it was just tangential and not really noticed. (By me, anyway.)

Anyway, as part of the settlement, private investment trust is now required to “think forensically” in evaluating its clients and its risks in auditing them. SEC Accounting and Auditing Enforcement Release No. 2237 contains the summary of the case and proceedings; what’s really interesting is in the back of it, in Sections F. (”Certain Steps Taken By Deloitte Since The Adelphia Audit”) and G. (”Undertakings By Deloitte”).

After the Adelphia audits, Deloitte started using proprietary financial analysis to assess its exposure to financial statement fraud or business failure in its client base of publicly-traded U.S. clients. There’s a strata of clients that they worry about based on the output of the analysis: the ones they put into the “Risk Management Program.”

Since May 2002, Deloitte has taken extra care with these clients:

– They notify the Audit Committee that the firm has received “Risk Management Program” status.

– Deloitte forensic specialists become involved in the audit planning for “high risk” clients in the Risk Management Program.

– There’s more tension built into the review processes of the audit engagement partner and the concurring partner.

– At the end of the audit for clients in the Risk Management Program, the audit team must document conclusions about the effectiveness of audit response to identified audit risks; a “Special Review Partner” must agree with them.

– Finally, Deloitte now develops and documents the circumstances for each particular company in the Risk Management Program to find its way out of the classification.

It gets even tougher …