US SEC Charges Deloitte Japan for Auditor Independence Violations

Deloitte Japan agreed to pay $2mn to settle charges related to audit reports it issued while dozens of its employees maintained financial relationships with the audit client.

The US SEC (Securities and Exchange Commission) has announced a settlement with Deloitte Japan over charges that it issued audit reports for a client when dozens of its employees maintained accounts with the client’s subsidiary.

Under SEC rules, accountants are not considered to be independent if they maintain bank accounts with an audit client with balances exceeding depositary insurance limits.

According to SEC Order, Deloitte Japan knew but failed to adequately disclose that Deloitte Japan’s former CEO Futomichi Amano maintained bank account balances with the audit client’s subsidiary bank exceeding these limits, which compromised his independence.

A subsequent investigation revealed that 88 other Deloitte Japan employees also had financial relationships with the audit client, including Yuji Itagaki, the firm’s former reputation and risk leader and director of independence.

The SEC also found that Deloitte Japan’s system of quality controls did not provide reasonable assurances that the firm and its auditors were independent from audit clients, including failures to to adequately staff and supervise its Office of Independence.

“Auditor independence is critical to the integrity of the financial reporting process,” said SEC Enforcement Division Associate Director Melissa Hodgman. “The auditor independence rules addressing bank account balances that exceed deposit insurance limits are clear, and audit firms must devote adequate resources to ensuring the independence of the firm and its personnel.”

According to the SEC order, Deloitte Japan violated the auditor independence provisions of the federal securities laws. It said Amano and Itagaki caused the violations, in addition to causing the audit client to violate its reporting obligations.

Deloitte Japan, Amano, and Itagaki have consented to the SEC order without admitting or denying the findings, and have been ordered to cease-and-desist from future violations.

Deloitte Japan agreed to pay USD 2 million in monetary sanctions and be censured, while Amano and Itagaki agreed to be suspended from appearing and practicing before the SEC as accountants. Amano and Itagaki are permitted to apply for reinstatement after two years and one year, respectively.

The SEC noted the remedial acts promptly undertaken by Deloitte Japan and the cooperation it afforded the SEC staff.

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