Blogs & Comment

Livent Auditors' Misconduct Appeal Denied

The governing body of Ontarios chartered accountants has upheld an earlier ruling that found Livents former auditors guilty of professional misconduct. An appeal committee of the Institute of Chartered Accountants of Ontario (ICAO) ruled three senior accountants from Deloitte and Touche’s Canadian armincluding the firms former chairmanviolated professional accounting standards while auditing the financials of the now disgraced-theatre company. The partners failed to perform their professional services in accordance with generally accepted standards of practice of the profession, the panel ruled in a 40-page ruling released earlier today.
Douglas Barrington, Deloittes former chairman, Claudio Russo and Anthony Power will be formally censured and must pay fines and administrative costs totaling more than $1.55 millionthe largest penalty ever handed down by the ICAO. The institute could have revoked the accountants’ professional accreditation, but instead ordered the three men to each pay a financial penalty of $100,000 and investigation and administration costs of $417,000.
In an earlier ruling the ICAO said it opted for the financial penalties since only Claudio Russo continues to work as an accountant. Anthony Power retired in 2000 and Douglas Barrington retired in 2007 after more than 34 years at the firm. Barrington was chairman of Deloitte and Touche’s Canadian operations from 1992 to 1996, as well as managing partner of the firm’s national office from 1996 until 2001. Barrington is currently the national chairman of The United Way of Canada.
The decision wraps up the longest disciplinary hearing every conducted by the ICAO. Charges against the accountants were originally laid in 2004nearly six years after Livent collapsed into bankruptcy amid charges that company founders Garth Drabinsky and Myron Gottlieb had manipulated the companys financial statements. (A verdict in the criminal fraud trial of the founders is expected March 25th.) A decision of the disciplinary panel was handed down in 2007 after more than two years of hearings that included nearly 200 exhibits and 8,000 pages of oral testimony. Deloitte and Touche was “disappointed” with the decision and will be consulting with the accountants to determine what steps – if any – may be taken next, said Jacqui d’Eon , a Deloitte and Touche spokewoman. *
The length and complexity of the proceedings, as well as the lack of cooperation by the accountants in the investigation contributed to the size of the financial penalties, the ICAO ruled. The length of the investigation was primarily the result of the complexity of the issues compounded by the less than transparent way the members (or their firm) dealt with the investigators and the Professional Conduct Committee, the original disciplinary panel wrote. The members were not forthcoming with respect to the relevant facts.
The appeal committee rejected appeals from lawyers representing Douglas Barrington that he should not be penalized so harshly since he was not involved in the day-to-day details of the Livent audit. The sharp criticism of Mr. Barringtons work much of it in a fairly short but critical period is painful to read about such a senior member of the profession, the appeal committee wrote.
The appeal panel upheld the ICAO disciplinary committees original findings that the three accountants failed to apply the proper amount of skepticism when dealing with Livents managerseven after those managers were caught lying to the auditors. At the heart of those charges is how Deloitte dealt with a controversial put agreement in a contract between Livent and Dundee Realty regarding redevelopment of the Pantages Theatre in Toronto.
The agreement would have allowed Dundee to pull its investment from the project ahead of other investors. Livent managers told Deloitte that the agreement had been cancelled since the agreement would have disqualified Livent from booking revenue associated with the deal until a later date. However, Deloitte accountants auditing Dundees books learned the agreement had not been cancelled and was, in fact, still in place.
The accountants demanded letters of explanation from Livent co-founder Myron Gottlieb (who was also a member of the audit committee of Dundee Realty’s parent company), and Dundee and Livent’s outside lawyers. All three provided letters that said the agreement had already been cancelled. However, explanations as to when and how the agreement was dropped differed significantly. The ICAO appeal committee upheld the findings of the original disciplinary panel that ruled those inconsistencies should have cast doubt on all of the assertions of Livent’s managers and caused Deloitte to increase its scrutiny of the company. “The auditors failed to consider the broader implications of the admitted deception, including the representations made by management throughout the audit,” the panel said in their original ruling.
Both the original disciplinary panel and the appeal committee criticized Deloittes handling of a last minute writedown of Livents production costs. During the audit, Myron Gottlieb sternly rebuffed Deloitte requests that Livent writedown any of its production costs. However, just days before the audit was to close, Gottlieb did an about face and suggested writing off $27.5 million in production costsmore than double the amount Deloitte had suggested. All three members had been satisfied because the $27.5 million write-down indicated that a new management would have a more business-like approach, and strengthened procedures would follow, the appeal committee wrote. Instead, the Discipline Committee viewed this alteration as a warning signal that managements representations by that point lacked credibility, and that the substantial figures basis required careful re-testing.
Late last month the Ontario Superior Court ruled that Claudio Russo and four other Deloitte accountants must answer question under oath in connection with a $450-million lawsuit filed by Livent against Deloitte and Touche. However, the court turned down a request by Livent to use transcripts of the ICAO hearings in the lawsuit.
* This blog post has been updated to include comments from Deloitte and Touche.