Duvall & Associates, Inc.
BUSINESS ADVISOR NEWSLETTER
 

Delphi's auditor may have big conflicts of interest

- by Alan Duvall 

Published in Dayton Daily News December 25, 2005  

A group of institutional investors in Delphi Corp. has recently petitioned the bankruptcy court to disqualify Deloitte & Touche LLP from maintaining its historic role as the company’s independent auditor.

The issue centers on the definition of independence.  To illustrate the conundrum at play, a little history lesson is in order.

Deloitte has been the long-term auditor and consultant of General Motors, reportedly generating over $100 million annual fees from one of its major clients. 

In this capacity, Deloitte has helped GM construct its internal controls and accounting system.

In 1999, Delphi spun off from GM to become a stand-alone company with GM its largest customer. 

Deloitte was named Delphi’s auditor and has been paid millions dollars annual auditing fees as well as over $50 million fees in 2000/2001 to develop an internal information and accounting system.

In early 2005, the SEC subpoenaed documents from GM and Delphi alleging improper accounting treatment of large transactions between the two companies. 

Lawsuits followed naming Delphi and Deloitte co-defendants in conspiring to defraud investors.

Let’s summarize.  Deloitte is paid handsomely to build internal accounting systems for two companies entangled in a buyer-seller relationship.  Deloitte is paid millions to audit internal control systems it was paid to create.  Deloitte is named as co-defendant with its two clients in investor fraud lawsuits.

And Deloitte still claims to be independent from it Delphi.

To begin, we could debate whether any company paid to audit a client is ever truly independent. 

But such arguments are fruitless since the alternative is audit by government - a profoundly worse scenario.

The debate gets more relevant if questions are raised regarding the propriety of engaging a CPA firm to audit the very internal accounting system it was paid to create.

But eyebrows must be raised when a CPA firm named as co-defendants with clients in an accounting fraud lawsuit is retained as auditor. 

What incentive does Deloitte have to delve into the true source of past accounting fraud issues it apparently failed to discover in its own prior audits?

Assuming Deloitte would maintain its independence in conducting such an investigation, it would in effect be paid to place a financial gun to its own head.

And that is precisely why Delphi investors are nervous. 

Alan Duvall is a certified public accountant in Dayton.  Contact him at Alan@Duvallcpa.com.