• Deloitte Wins Major Round Re: Alleged Inside Trader Flanagan

    By • Jan 5th, 2010 • Category: Latest, Pure Content, Your Career

    knockoutrbFrancis Pileggi at the Delaware Litigation blog reports that Deloitte has won a partial summary judgment against Thomas Flanagan, the Chicago-based, ex-Vice Chairman of the firm accused of multiple counts of insider trading. My original post, describing how I broke the story first on Twitter based on a confidential tip, is here.

    I spoke to Francis Pileggi who said, “All that’s left is for the court to decide how much this former partner will be paying his firm.  It may take a while to ascertain this but from the looks of it, it may be a very big number.”

    But Deloitte should be careful what they wish for.  This litigation has forced them to reveal their woefully inadequate policies and procedures regarding independence compliance.  While trying to placate their clients who were dragged through the mud on this and exact revenge against their own leadership-level partner – a pillar of the Chicago social and philanthropic community – they’ve admitted to allowing Flanagan to breach their standards more than 300 times and to get away with it. If it weren’t for the otherwise widely maligned SEC’s targeted action on the case, Deloitte would have remained oblivious.

    Deloitte has sustained more than a bloody nose and a few cuts in this fight, even though they seem to be winning. It’s not over until the opponent is on the mat, down for the count. Better yet, knocked out cold, unable to inflict any more damage to the firm. Given the long tail of matters before the SEC, PCAOB, DOJ, and of private litigation, it may be a while before all the referees’ final decisions.

    There’s been virtual radio silence in the Chicago media on this case. Crain’s Chicago Business hasn’t written anything since November of 2008, despite my encouragement.  I was quoted in the Chicago Tribune later that week in November 2008 after several others, including Ryan Blitstein and Bruce Carton also reported the story.

    Here’s what Emily Chasan at Reuter’s says today:

    “U.S. accounting firm Deloitte & Touche LLP has won a lawsuit against a former top executive it accused of improperly trading in stocks and options of the firm’s clients, including Motorola Inc and Best Buy Co Inc….A Delaware court sided with Deloitte in the case in an opinion dated December 29, saying the former executive, Thomas Flanagan, had “obviously” been in violation of his employers’ independence policies in making certain trades….the 30-year partner who had risen to vice chairman of the firm had secretly hidden trades in shares of Deloitte’s audit clients and lied about it to the firm.

    “Because an auditor sells, at base, its independence and integrity, the firm relies heavily on the purported honesty and independence of its professionals,” Vice Chancellor John Noble, of the Delaware Court of Chancery, wrote in his opinion…Flanagan had made more than 300 trades in shares of Deloitte’s audit clients, including several clients for which he was Deloitte’s advisory partner….Dozens of times, Flanagan entered his holdings in Deloitte’s system, then quickly “corrected” entries to indicate he had disposed of restricted securities, but in fact continued to hold them… Deloitte was unaware of the trades until the U.S. Securities and Exchange Commission contacted the company [re] the audit for Walgreen Co in 2007…He was also accused of trading in securities of Deloitte clients Best Buy, Allstate Corp, Motorola, and other firms, often while working directly on the companies audits.

    Flanagan resigned from Deloitte in 2008 about two months before the lawsuit was filed, … SEC has not announced any charges against Flanagan…exercised his Fifth Amendment right against self incrimination…”

    Here’s what I said back in November of 2008:

    “I think [Deloitte was] aware of this guy’s rule-breaking.  In my experience, when someone like this 30-year “elder statesman” is flouting the rules so egregiously, they usually can’t help blustering about it.  He may have complained to others, at all levels, about the “SOB, dumbass, rule-jockey, non-client service, idiot, loser, dweebs” who were bugging him to respond to their inquiries about his annual certifications…

    I am also surprised that Deloitte doesn’t appear to have a process in place that most other firms I’m aware of, including PwC, have. PwC, for example, has a whole team of auditors in their Jersey City office whose only job is to request tax returns, brokerage, bank and other investment statements from folks that either come up for review based on a “random sample” or are high risk like Mr. Flanagan.  They have this process because their colleagues at Coopers and Lybrand screwed up on this stuff so badly before PriceWaterhouse bought them and they were forced to put it in place….

    Or maybe Mr. Flanagan did get audited. Maybe they asked for this info and he blew them off. Or maybe they were given documents that didn’t match up or were incomplete.  Or maybe he kept putting them off. Or maybe he had been called on flouting of the rules many times but no one in the partnership was willing to call him into the Principal’s office and whack his knuckles with a big ruler once and for all.”

    How long will it be until the SEC finishes its investigation of the case, with regard to Flanagan and/or Deloitte?  Six years like Bally’s?

    Will the firm or Flanagan ever get sanctioned by the PCAOB?  I’m assuming Flanagan is “retired”, but will the SEC forbid him to act as a CPA?

    If the PCAOB issues a disciplinary sanction against Deloitte as a firm, it will be only the second time it has done so against a Big 4 firm, both times against Deloitte.  How many strikes does a firm get?  If it’s as many as EY seems to be getting, then we are stuck with seeing outrageous violations of independence indefinitely due to the profession’s and the regulator’s “too few to fail” policy.

    The SEC must look carefully at the Deloitte internal compliance function.  It failed, and failed miserably. There are so many things wrong with this picture from an internal risk and quality management perspective, regardless of the individual partner’s lapses.  What good is a profession, and a partnership of professionals, if they do not police their own according to their standards and practices? Suing Flanagan puts money back in the Deloitte partners’ pockets – and perhaps assuages their clients who received calls from the SEC because of Flanagan – but does nothing for the clients’ cost of their investigations or for those shareholders’ confidence in their vendor, Deloitte their auditor.

    Deloitte has abdicated its public duty.

    From the summary judgment document:

    • Deloitte was not aware of Flanagan’s violations until alerted by the SEC investigation.
    • Deloitte seemingly does not have a requirement for high risk employees and partners to submit physical account statements that can be audited against system reporting.  It seems to be depending totally on self-reporting and the honor system, even for the highest risk partners and restricted entities.
    • Deloitte seems to have a glitch in its independence tracking system and early warning exception reporting system for compliance if their system allows the appearance of reporting even though entries are immediately backed out. I guess Flanagan’s secretary knew how to do that too?
    • Deloitte seems to have a lack of will to enforce its policies for tenured, powerful members of its partnership or to kick them out of the firm when they’ve been found guilty of sins against the profession and their clients, the shareholders.
    • Deloitte must encourage a culture of blame and delegation of responsibility for even the most important partner responsibilities, ones that are critical to its reputation and integrity. Talk about an embarrassing and completely jerk-face cop out of leadership responsibility…

    “Flanagan suggests that there is no evidence that he, himself, used the Tracking & Trading System, and that any failure to correctly input his trades was likely an error by his secretary.”

    The SEC and PCAOB must complete a thorough review of Deloitte’s Independence Compliance process and systems and implement sanctions, recommend immediate remediation, and install a monitor to correct failings.  Some areas to look at:

    • How they pick their samples of who to audit and how thoroughly and frequently those samples are manually audited for independence compliance;
    • Whether Deloitte selects employees and partners randomly and who are high risk for physical documentation on a necessary periodic basis;
    • How does Deloitte populate and maintain its Restricted Entity List?  (This is a sore issue with all the firms.)
    • Whether very senior partners are involved in enforcing the rules, in insuring follow-up on missing documentation, and in hauling in partners for disciplinary action who blow off the internal compliance team. Are senior partners “independent” enough of their colleagues to enforce the rules against the incorrigible and potentially malevolent?
    • What type of follow-up and discipline process does Deloitte employ for employees, partners and especially its most senior partners in high risk engagements?

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    57 Responses »

    1. I’m pulling out a small little comment you made that I think warrants some discussion.

      Where does the line between leadership responsibility and personal responsibility lie? I’m constantly being told by people above me that I need to take personal responsibility for…well….everything. This includes first drafts of performance feedback…something I’m becoming rapidly uncomfortable with. Why am I writing my own feedback? Isn’t that a self-evaluation? Some of that makes sense, but what is it exactly that they are responsible for as leaders of their own people (read: staff or peers).

      Big 4 management seems to have a finely tuned “not my responsibility, you need to take ownership” response to everything under the sun. The example here; keep tabs on it’s own people’s independence? Nah, they need to take personal responsibility for that!

    2. Francine:
      My spin is different. Flanagan is in no position to do anything lest he be charged with securities fraud. Flanagan was lanced on “parallel proceedings”, i.e., the potential for dual civil and criminal charges. That D&T won a “partial summary judgment” also does nothing for me. D&T’s claim it was unaware of Flanagan’s activities until the SEC told it, does not pass the smell test.
      My spin: The SEC is fronting for D&T. Instead of putting D&T out of our misery, remember Kroeker is “ex-D&T”, the SEC is letting D&T claim igorance. I no more believe this story than the SEC’s preposterous Joe Jett prosecution at the behest of General Electric in 1994-95.
      Flanagan is a fall guy. I am sure other D&T partners make illegal trades too. And PWC partners, KPMG partners, E&Y partners, etc.

    3. Are you kidding? With everyone fearful of losing their jobs and income streams, it isn’t very hard for Deloitte to find “witnesses” willing to testify on their behalf. Believe me, this firm knows how to twist its employees arms and isn’t shy about doing so. They maintain a legion of attorneys, ready to do battle. The lesson learned is to not mess with Deloitte, because you will lose.

      You, Francine, are well aware of the number of people who posted about their Deloitte layoff experience. If the world were a fair place to live, Deloitte (the organization) would go straight to hell. Yet, Mr. Barry has managed to land the firm on numerous best companies to work for list and continues to advertise through their website on how to handle layoffs. This firm can get away with murder.

      Have you seen the movie Food, Inc.? The people who work for Deloitte are like the hormone injected chickens who care barely walk locked in the dark compounds. Deloitte is the Tyson’s Chicken or Monsanto (evil corporation) who can basically do whatever it wants. The consumer continues to buy and is unaware of the realities. The people (aka, government) who can make a difference continues to look the other way. As long as everyone makes money, who cares if a few sorry souls get their lives ruined.

    4. Great comments so far everyone. Thanks.

      @Mr. X I agree. I see the whole performance feedback process Big 4 uses as one big abdication of personal responsibility for managing, coaching and guiding people. See my post: http://retheauditors.com/2007/06/26/when-is-a-layoff-not-a-layoff/

      @Independent Accountant
      I agree. I strongly believe Deloitte leadership knew this guy was bulldozing for a while. They were impotent to stop it. If he did what they say he did (and the court ruled based on some examples because it only took one that he did not provide a defense for to be enough) then he did breach his partnership agreement and everything everyone knows about independence and audit clients. There’s no ambiguity in that. Whether the SEC is on slow-mo and whether Kroeker’s Deloitte connection has anything to do with it, I can’t say. I have met and spoken with Kroeker and seems a decent guy but as others have said, the tentacles are legion and very strong.

      @Anon #3 You can beat Deloitte or any one of the firms. But it takes time, money and a good case. There are many cases out there and they take forever, but people and companies do win. As we see more and more cases come to fruition soon (and Deloitte has a ton of hairy ones post-financial crisis) then we will see odds of beating all of them, if only because of the time and money it takes for firms to defend them well, go down.


    5. 1. Who watches the auditors? Answer: Francine McKenna

      2. Who audits the auditors? Answer: The firm’s internal audit staff

      3. Who watches the internal auditors? Answer: The firm’s leadership team

      4. Who audits the firm’s leadership team? Answer: Apparently nobody.

      Seems to me that it would be a pretty straight-forward step to test any firm’s independence controls. Just pick a few people — including partners in client-service as well as firm leadership roles — and have them produce the documentation to support the data they’ve input into the independence system. Don’t the firms already run that test on partner candidates?

      Moreover, I seem to recall Andersen annually tested a random sample of employees, making them provide all the documentation to support the independence dislclosure. Please don’t tell me Andersen had stronger independence controls 10 years ago than Deloitte does today ….

      — Tenacious T.

    6. Francine,

      I don’t know about that. Deloitte has managed to keep its nose clean through the whole Madoff mess. Also, it will be hard for any plaintiff to pin blame on Deloitte for auditing companies that happened to fail since the financial crisis (i.e. Merrill, Bear, WaMu), which is probably why we haven’t heard anything about litigiation from those companies’ shareholders.

      Unless someone can prove that Deloitte deviated from GAAS then I don’t see how they’re on the hook for much litigation wise.

      PwC, on the other hand, has some Madoff related exlaining to do.

    7. @Philip J. Fry

      Dude, You missed a post. Although it seems Deloitte missed the Madoff boat, they have a ton of subprime/crisis related litigation they are spending time and money defending. Add to that the myriad garden variety suits and related investigations by SEC and PCAOB for this one and several employment related suits due to the crappy way they’ve handled their cuts in the last two years and you’ve got bunches of dough spent on litigation. Re-read this one and get back to me. :)


    8. Francine,

      I stand corrected, not sure how I forgot about that post. I must have been distracted by the video clip of Diane Cannon parading around in her underwear that you embedded in that post….:)

    9. I agree with the post by Anonymous above. Having known a Deloitte partner intimately for a number of years I find it hard to believe that no one was “in the know” with this situation. The man I dated was the most dishonest person I’ve met in my entire life. Off the charts dishonest. Apparently, he was “investigated” late 2008 and Deloitte found nothing on him – I believe that translates to – Deloitte could find no evidence that could get them in trouble. A shoddy investigation conducted to make sure they could deny knowledge of his behavior. They never picked up the phone to ask any questions of anyone who could possibly provide insight. They merely went through emails and expense reports. That’s a pretty lazy investigation. But, perhaps all they need to do for their own CYA. Of course, this guy is the type of guy who can look you straight in the face and lie his *bleep* off, so maybe he just has them snowed.

    10. I agree with Skeptical about the types of people who advance at Deloitte. If a partner at Deloitte told me the sky was blue, I wouldn’t believe them. The comment about looking you straight in the face and lying is so true. Its like they are almost daring you to challenge them.

    11. @9 and @10 – All true, but don’t single out D&T. I have worked for a couple of the B4 and that attitude is pervasive for the ‘successful’ people. I suppose there are multiple definitions of success, but the one that works in the B4 includes setting aside morals, conscience and everything you learned in kindergarten. There are exceptions, but not many.

    12. What were once vices are now habits. In addition to the landmark Doobie Brothers album, these precedents were set with Enron, AA, Bernie Ebbers, and that other guy. Insider trading, conflicts of interest, yadda. Don’t worry, the evil bad guys will get their due process of law, a fair trial, and a fine hanging. Sarbanes-Oxley is the crusading legislation arriving just in time to solve all these problems, sort of like World War I as the war to end all wars.

      Since we’ve seen this movie already, the public outrage is not there anymore. White noise. We must make sure this doesn’t happen again, yawn. The Huron hooligans look like they are going to walk. The american-as-apple-pie citizen at ross perots company blatantly traded on inside information in the millions, whats he going to get? Pay the fine and court supervision.

      So again whats the solution? thats the (unqualified) $64,000 question. Raj Galleon got the perp walk. Transfer the SEC enforcement group to the FBI maybe.
      At least 300 trades? Why didn’t he just lease a seat.

    13. Is it just auditors that are evil or accountants in general? Maybe I should join a more ethical financial profession, like being a lawyer or investment banker. Or join the army and go kil bad guys. I was trying to find a job where you could be independent and do a public service though. Are things better in other countries? Gosh, what a horrible country America is. Can’t we just pass a law to arrest all the acountants and trust the companies and bankers to get it right without these bad auditors making things worse?

    14. anony @ 13,

      I’m had trouble deciding whether your were trolling or just being a jerk. I decided to split the difference.

      One of the main points of many posts on this site is that the auditors don’t do a good enough job. Period. They can — and ought — to do better.

      Far from writing off all auditors as being evil or completely irrelevant, the goal is to have the profession “man-up” and seriously address the gaps in its framework and procedures.

      More response than that, you do not deserve.

      — Tenacious T.

    15. TT @14 –

      Yes, and the bitch of it is, people will always act in the way that they are incented. Auditors are not incented to do a better job of auditing, except by the weak regulatory environment (they might get picked for a PCAOB review). Their only true incentive is to create revenue for their firms – everything else is optional, including protecting the shareholders.

    16. vatp46a @ 15,

      Yes, indeed. Until somebody addresses the greed inherent in the current system, serious reform efforts are not likely to amount to very much. Not only does somebody need to create positive incentives for audit quality, that same somebody needs to create serious disincentives for acts of audit negligence.

      One thing, though. We need to figure out who that mysterious “somebody” is. Because the SEC and PCAOB and AICPA have proven–shall we say?–ineffective at implementing any serious reforms to the profession.

      — Tenacious T.

      (Now I have a vision of a medieval peasant loudly yelling, “Come see the greed inherent in the system!!”) — TT

    17. @15

      So I should tell my audit partner to “man-up” (sexist a little?) because DT had a fubar with independence with a partner? That’s pretty insulting to the thousands of accountants that work every day to do the right thing both because it’s the right thing to do and because there are regulatory mechanisms in place to discourage anything else. It’s insulting to the hundreds of accountants at the SEC who work to find fraudsters and keep folks honest. And it’s insulting to the hundreds of PCAOB reviewers who fly around the country keeping the audit firms on ball. So I’m sorry you don’t think I deserve your due consideration, but it sounds like very few people live up to the standards of Tenacious Truman, tenaciously armchair arbitrating the actions of all accountants. Why don’t you “man up” (or woman up) and get off your holier than though cloud in outer space? Do you even have a sense for what the audit failure rate actually is in this country? Do you have any sense that no matter how good the system is there will be a certain rate of errors? Do you any idea what the difference is between the actual situation and the optimized error rate? What I resent is the air of certainty and castigation. Of course everyone wants a more efficient and effective audit, accounting, and regulatory framework. But you can look for that without impugning everyone except yourself… but don’t bother to respond since your clearly above the fray of dealing with “trolls” who just happen not to be stone throwing peasants hungry for a public execution.

    18. @16

      I would like to understand how you propose to address the “greed inherent in the current system” in the United States. According to many philosophers, including Adam Smith, people will generally work in their own self interest, so it seems like a difficult thing to remove greed from the human character entirely, accountants or not. Traditionally, destructive greed has been moderated by systems of ethics, internal control systems, and enforcement mechanisms. CPAs have a well developed ethical framework and firms are required at law to maintain internal control systems which are reviewed annually by a well funded and highly compensated independent regulator in the form of the PCAOB (indeed PCAOB Board members are both unconnected to the audit industry and make 600k+ per year). Further, firms are subject to the discipline of both the SEC enforcement mechanism and a private litigation system that is both more robust than any legal environment in the history of mankind and allows for unlimited monetary judgments. By any historical or comparative standard, it seems like auditors are highly regulated. Personally, I think this is indicative of a broader problem with capitalism. I suggest a workers’ revolution in which labor seizes the means of production and temporarily appoints philosopher kings who can reverse the fetishism of commodities that has oppressed the people. By eliminating the capitalist class and reeducating the masses (or more accurately, their children) we can achieve a communal utopia. But I’ll leave that to others. I’m not here to write cookbooks for the future.

    19. @14 wow a troll or jerk. r those the only options for “ppl” who disagree with u? How bout a chaotic neutral halfling paladin or a lawful good orcish cleric?

      @10 congrats u just dissed a firm of 30,000 people in its entirety; u must be super smart to know that everybody who advances at DT is a horrible person. like omg, DT ppl aren’t even human are they? so much worse than ordinary ppl…

      @9 u have a compelling story to share–the fact that a DT partner dumped u is striking evidence against the entire internal control system of the firm.

    20. @aa – so are you part of the former, greedy Arthur Andersen bunch? Yup, I just dissed the entire Arthur Andersen bunch too. Why don’t you read all the other Toilet and Douche slams on this board, plus greendotlife? Then, you can come back and tell me how I can diss a whole firm. Dude, cancer cells multiply at an exponential rate.

    21. Karl @ 18,

      I’ve actually posted a few thoughts in that direction elsewhere on this site. Check ‘em out.

      If you really believe the current framework you describe is effective, than our two view of reality don’t meet at any contiguous points.

      — Tenacious T.

    22. if you want better accountants, why not raise entry level salaries? 50k, MAX??? for people with master’s degress? i shouldve stayed an engineer, where id be starting at least 65-70k off the bat, and do something genuinely interesting. there is a definite brain drain into other professions and other parts of this profession from public accounting,mand the ones that dont leave are left bitter about their pay and hours, hence the source of fraud and self-entitlement. i for one hope to return to school as a prof soon.

    23. @17 says…

      “Do you even have a sense for what the audit failure rate actually is in this country? Do you have any sense that no matter how good the system is there will be a certain rate of errors?”

      You obviously haven’t thought about the audit failures that don’t get reported, have you? You know, the ones that are successfully covered up in a joint effort between the auditors and the client…

      Once you take those failures into account, why don’t you then re-calculate the audit failure rate…you’ll be mind-boggled in no time.

    24. @20 — so who else do you think is “cancerous” (ie subhuman) en masse? Any particlar religions, ethnic groups, or nationalities? I’m sure you string together a bunch of people mouthing off about alleged improprieties of any group you think should be demonized. It’s great how you don’t even think you need real evidence, just the weight of “internet posts” should convince us everyone at Deloitte is a monster…

    25. Like the laws that are needed, the evidence needed is already there.

      Lehman Brothers. Bear Stearns. Washington Mutual. AIG. Countrywide. New Century. American Home Mortgage. Citigroup. Merrill Lynch. GE Capital. Fannie Mae. Freddie Mac. Fortis. Royal Bank of Scotland. Lloyds TSB. HBOS. Northern Rock.

      Does the independent audit firm get threatened with removal for reporting that the client is a financial disaster?

      If not, does that suggest a collusive relationship, when the gap between the pre-restated earnings and the unavoidably inevitable collapse is a mile wide? Or do they risk forfeiting all those juicy fees to their hated rivals, even though they used to work at hated rivals llp.

      Without a clean audit opinion, those companies cited above would be in big trouble right now.

      If every audit firm had the confidence that any member firm would have refused a disingenuous audit opinion, could the hucksters fire the entire audit profession? If every audit firm faced immediate accountability for their accountability, wouldn’t they possess that confidence and stamp those client books as “bad business, baby”. Pay us for the bad press, or pay someone else, but the same bad press is coming your way, baby.

      There are overwhelming losses that haven’t even been recorded yet. They won’t be until that dam(n) also breaks. KB Homes reported a small profit for Q4, RIGHTTTTT…. Must be the talented oh never mind. Why even go there.

      Good people would get angry when their hard work gets stomped on. But if you are a first-rate dedicated professional working on Enron, what is the result going to be?

      Unless you are here just for the cat fights………..

    26. @23 not sure why it’s “obvious” the audit system is broken. It seems to me most people on this board just come up with vague accusations or premises with no evidential matter in support. Accusing someone of being a crook is a big deal. If you have evidence of collusive fraud you should share it with the SEC.

    27. Anony @ 17,

      Flanagan was not just “a partner” — he was the frickin’ VICE CHAIR OF THE FIRM.

      Tone at the top, dude. Tone at the top.

      The rest of your post is troll-bait, so I’ll refrain from responding.

      — Tenacious T.

    28. I find it interesting that the whole Flanagan episode has generated very little attention in the mainstream financial press. When a hedge fund executive (at Galleon) was discovered insider trading his name and photo made the cover of the New York Times. The Vice Chairman of a Big 4 firm does the same thing and the only place you hear about it is here….what gives?

    29. @Philip J. Fry

      That’s been my point for the last two years.
      Benign answer: Accountants have cooties and journalists think if they touch them they will become hopelessly confused no matter what the topic.

      Evil answer: The Big 4 are very good at squelching these stories and the media goes along with it because they are big advertisers and sources of filler content in slow times.

      PS: I am amazed at the ability of some professionals to bury their head in the sand and even remotely defend either this individual or the firm in this situation.

    30. @Francine,

      I think you give the Big 4 leadership too much credit. I doubt they have the kind of pull needed to manipulate the press, it’s more likely that the general public has little understanding of (or interest in) the world of the Big 4 so the press doesn’t waste their time on what us bean-counters do.

    31. @10 — if a partner told you the sky was blue…

      In Shanghai the sky is usually white
      During a storm it can be black
      At night time it is something entirely different
      What about the sunset

      Look at what people tell you in context – regardless of whether they are a partner.

    32. I agree with Francine’s evil answer. How does a firm treat its people so poorly and have the stories plastered all over the internet, while still being voted by Newsweek and such as a best place to work? Money talks.

    33. @26 says

      “Accusing someone of being a crook is a big deal. If you have evidence of collusive fraud you should share it with the SEC.”

      We’ll sir I do agree that accusing someone of fraud is a big deal…too bad the SEC hasn’t thought so recently (ahem..cough…Harry Markopolos…cough ahem…Bernie Madoff on a silver platter…cough..gag…7 years of contacting the SEC with no action taken…double cough). Next time I see fraud, I will be sure to take your advice and tell the good ol trustworthy, highly responsive SEC. Those guys will surely take care of matters quickly just like they did with Madoff.

      The good ol SEC, always there to catch fraudsters in the nick of time.

    34. […] have two high profile cases here in Chicago: Deloitte’s lawsuit against their own Vice Chairman Thomas Flanagan for breach of contract related to inside trader charges and the SEC’s recent actions against […]

    35. I have trouble understanding how this happened. In our firm (not DT) all partners – 100% – are subject to audit of their investments on a 2-3 year cycle and all others manager and above on a random basis. Partners need to provide their tax returns, their spouse’s returns if requested (yes, a horrible invasion of privacy and not a pleasant discussion with your husband or wife, but hey, being a partner is not all sunshine and lollipops), and their brokerage statements for the year to prove they entered their investments properly within the specified time limt (a few days). The system in which you need to enter your investments is robust and clearly shows those that are prohibited- audit clients of course, but others flagged due to other sensitive asignments or connections to clients too.

      It goes without saying you should not have a prohibited investment on those statements, the audit is very thorough, and the penalties severe. I am personally aware of a partner separated because their husband refused to abide by the restrictions. The same goes for any family members financially dependent on you. I’ve been audited twice in the past five years, and make a declaration of independence quarterly. But full disclosure – I work for a living, I don’t run the place. Even so, I can’t imagine DT has less stringent policies. I can imagine the worst kind of crook simply ignoring them and hiding the evidence in an undisclosed account (although that is what the tax returns are for – to detect this sort of chicanery – unless of course the individual is cheating on his taxes too, in which case it is hard to know how to get at the truth effectively). Everyone I know – and I know a lot of partners – is honest and very careful in this matter because of the potential consequences and because they are fundametally honest people. I’m reluctant to blame DT if this is a case of a really bad apple. To blame your secretary for this type of independence violation is I think a very good measure of the chacter of the individual involved.

    36. @30 absolutely true. the financial pull of the audit industry is microscopic compared to the erstwhile investment banks and many many other industries. that’s the fascinating thing about this website. if you read it all day you would think “the auditors” (insert other hated group here) control the media, the financial industry, and are working to corrupt the morals of “good american citizens” (insert favored group here) on a daily basis because it is in their DNA, audit partners are just born bad (and greedy, and they have horns and tails). yet even the harshest critics of the industry (except francine) acknowledge that the banks were the power players in the crisis, for instance. you can account for something exactly right (not saying everyone did, but the vast majority) and still have a crash. in fact, as the banking industry loves to point out, that could even be a natural outgrowth of “procyclical” fair value accounting. assets go up in value until they come crashing down in a bubble. as far as the media goes, auditors do not control the media. i think that’s super obvious except to the most die hard conspiracy theorists and other haters on this website. as an ethnic minority, i guess i’m just very sensitive to where the line is crossed between actual substantive policy discussion and something much more disturbing.

      the other hilarious thing to me is how people post on this website all day simultaneously about how auditors get paid too little and too much. both cannot be true. a staff person that makes 50k year one is a partner who makes $250k year 10 if they work hard. partner was a staff person, staff person will be a partner (if they make it a career). so i don’t get it. then there’s the simultaneous posting that only “bad people” advance to partner, while others gripe about how promotions are in lockstep and that it’s impossible to distinguish oneself from ones peers on the advancement track and that only the worst performers are denied promotion. the audit industry can’t be guilty of everything they are accused of on this website, since many of the accusations conflict with one another!

    37. @33 just because the police don’t catch one criminal, doesn’t mean you don’t report a second criminal. think about it. or are you just a vigilante at heart? there’s been a robust discussion of the SEC’s failures and there is obviously new leadership and a new enforcement structure and new resources being deployed by that agency. are you really suggesting that securities fraud should not be reported to the sec because tips about madoff were not followed up in a competent way by the cox sec? if so, and if that is the general nature of discussion on this board, then i’m shocked this blog got voted one of the best, because that is an incredibly irresponsible sentiment and totally at odds with the stated objectives of this blog, which i thought were to have a substantive and constructive discussion of the audit profession.

    38. by the way, i notice that Francine comes down hard on bloggers who defend the audit profession from some of the most extreme attacks on this board. i have never seen her step in to discipline an irresponsible comment from the other side. but i guess that is the nature of propaganda in this rush limbaugh, sean hannity, francine mckenna world we live in.

    39. @17 – Gee, I step away for a couple of days and missed some lively discussion (lesson learned). Anonymous, you certainly seem to be in touch with your anger. If you are in a position of responsibility at a B4 firm (and you certainly bluster like you are), and you are not under siege from inside your own firm regarding business development then you are either in a very small practice that no one cares about or are oblivious to the true nature of the business and other members of the partnership will likely be carving up your book of business like a Thanksgiving turkey. I wish you good luck.

    40. 35 – D&T’s policy is largely an “honor system,” and I am not aware of a stringent audit process, though it sounds like your firm provides a good model.

      38 – Limbaugh, Hannity … McKenna? To borrow from Sesame Street, “one of these people is not like the others …”

      General comment – It’s disappointing to see so much resistance to the idea that we as accountants should hold ourselves to higher standards. It’s surprising that many don’t seem to think that busting the Vice Chairman is such a big deal, if 50% + 1 of the partners are not cheating. I understand that perfection is not realistic, but that’s not what we’re asking for here. Let’s demand accountability and stop making excuses for poor (and dangerous) behavior.

    41. A few of these posts relative to audit quality raised my curiosity – but has Francine or anyone else come across specific offices of the Big Four that seem to have a higher propensity for restatement/challenges than other offices? Of course there are professional standards – but curiosity is wondering – do specific offices/regions within each of the Firms have a signficantly lower quality threshold than the more robust offices? Is it a lack of audit documentation? A lack of applying professional judgment? That would be interesting…

    42. @Tony Rezko

      Someone once compared me to Oliver Stone, the director. I’ll take that one.


      The PCAOB knows based on their inspection process (I’m hoping) which firm has worst risk and quality record and which offices or member firms in a network are the worst. However, their data is not public. It’s part of Part 2 of the inspection reports and is not disclosed unless a firm (only a few small ones so far) are so incorrigible and stubborn they do not respond to PCAOB recommendations for an extended period.

    43. @3 and 9, don’t be so sure that the partners aren’t being disciplined for their actions. International tax leadership had a complete shake up, with a few partners being demoted from leadership positions. The question is whether the new leadership is any better and what other changes will occur under the new leadership. It could simply be a bunch of snakes back stabbing one another in a never-ending process. Time will tell.

    44. Seems the discussion has moved away from Flanagan himself. Other than public humiliation, will he ever suffer any economic loss? When?

    45. From past experience with global DTT, they do serious audits of partners. Just the expenses system required original bills for everything – doing monthlies for globetrotting executive partner was hell. His annual independence review was thorough and tough.

      Flanagan could have just forced off, cheated or I don’t know. A big problem is that as Vice Chair any move against him is inherently political and he can mitigate moves by independence group as machinations of another member of exec and be believed. That is how people get taken down at that level, something which I saw first hand.

      The big problem is that at very high levels people are assumed to be rational and have too much to lose to cheat. They are too powerful to manage through the normal system and have to be trusted. At that level even prosecutions get tendentious – was Enron criminal or just a run on the bank phenomenon, what about AOL capitalizing customer acquisition costs, Broadcom fiasco… There are multiple defensible views, and to conduct that inside a firm can get very ugly and open firm and people to liability.

      Look at Galleon case – need multi year FBI wiretaps and multiple confidential informants to break that case. No firm is going to do that against it’s own execs. Just trying to stop board leaks got HP and Carly Fiorina in deep trouble.

    46. […] have two high profile cases here in Chicago: Deloitte’s lawsuit against their own Vice Chairman Thomas Flanagan for breach of contract related to inside trader charges and the SEC’s recent actions against […]

    47. […] have two high profile cases here in Chicago: Deloitte’s lawsuit against their own Vice Chairman Thomas Flanagan for breach of contract related to inside trader charges and the SEC’s recent actions against […]

    48. […] have two high profile cases here in Chicago: Deloitte’s lawsuit against their own Vice Chairman Thomas Flanagan for breach of contract related to inside trader charges and the SEC’s recent actions against […]

    49. While Deloitte has its faults – as any large firm does – I consider this blog to be primarily a feeding frenzy involving a group of disaffected anti-capitalists. It would be wise to see how the legal aspects of this case shake out before acting like a pack of dogs sniffing each other, if I may quote Cyrano.

    50. […] Deloitte won a preliminary victory against Flanagan, they obviously still have a lot of work to do to improve their independence compliance function […]

    51. […] Did Flanagan not think that he would eventually get caught? Francine McKenna places the blame a compliance failure at Deloitte. […]

    52. […] “dupe” his fellow partners and professional colleagues more than three hundred times, as Deloitte’s lawsuit against him […]

    53. […] It’s getting really tough to keep track of all the partners under SEC sanctions. Hell, even famous Floyd Norris and his undercover buddy at the SEC couldn’t do it.  It’s easier if you keep the guys in “time-out” on the payroll like Deloitte and EY do, rather than kicking them to the curb like KPMG did.  One KPMG ingrate turned around and sued the firm! Worst case is when the firm has to sue their own. […]

    54. […] “dupe” his fellow partners and professional colleagues more than three hundred times, as Deloitte’s lawsuit against […]

    55. […] When something goes wrong, they often try to publicly ignore the problem, relegating it to a “foreign” issue. They are quick to distance themselves from the “rogue” partners and firms, sometimes going so far as to pull their legal support or sue them in order to save their own skins. […]

    56. […] and you and I have simply cherry picked different cherry trees. Having one rotten cherry (named Flanagan) on the tree does not make the entire tree rotten. Also concluding that Deloitte’s $1 million […]

    57. […] sources tell me KPMG is not paying for London’s defense. Deloitte sued Flanagan to assuage its clients. I would expect that’s next. If KPMG’s behavior during the 2005 tax […]