SEC Press press_release 8 KB 4,736 chars

SEC Charges Deloitte & Touche and Two of its Personnel for Failures in Their Audit of Just for Feet

Release: 2005-66
Caption: Securities and Exchange Commission v. Deloitte & Touche LLP, et al.

summary

The SEC charged Deloitte & Touche LLP and its engagement partner Steven H. Barry and audit manager Karen T. Baker with failing to detect fraud in Just for Feet’s 1998 financial statements—including fictitious revenue, improper inventory accounting, and fraudulent display booth income—resulting in a $375,000 penalty for Deloitte and two-year and one-year bans from practicing before the SEC for Barry and Baker, respectively.

paragraph

The SEC charged Deloitte & Touche LLP and two of its personnel, engagement partner Steven H. Barry and audit manager Karen T. Baker, with failing to detect fraud in Just for Feet, Inc.’s 1998 financial statements, which included fictitious vendor receivables, improper inventory reserves, and fraudulent recording of display booth values as income. Deloitte received $361,000 in audit fees but violated GAAS by ignoring internal risk flags and failing to perform adequate testing, despite Just for Feet being designated as a high-risk client. Without admitting or denying the allegations, Deloitte agreed to a $375,000 penalty and censure, while Barry and Baker each accepted a suspension from practicing before the SEC—two years and one year, respectively—with eligibility for reinstatement after those periods.

narrative

The SEC charged Deloitte & Touche LLP and its engagement partner Steven H. Barry and audit manager Karen T. Baker with serious audit failures in connection with Just for Feet, Inc.’s 1998 financial statements, which were fraudulently inflated through unearned and fictitious vendor receivables, improper accounting for obsolete inventory, and the fraudulent recording of vendor-provided display booths as income. Despite being flagged as a high-risk client under Deloitte’s own National Risk Management Program, the firm and its personnel failed to follow generally accepted auditing standards (GAAS), did not adequately test key financial assertions, and ignored clear red flags of fraud. Deloitte received $361,000 in audit fees for its flawed work, which enabled Just for Feet to file misleading registration statements with the SEC in 1999. Without admitting or denying the findings, Deloitte agreed to a $375,000 penalty and a formal censure, while Barry and Baker each consented to being barred from appearing or practicing before the SEC—Barry for two years and Baker for one—with the possibility of reinstatement after those periods. The SEC emphasized that auditors have a duty to exercise professional skepticism, particularly when fraud indicators are present, and noted that Deloitte’s conduct constituted unreasonable and improper professional behavior under Rule 102(e)(1)(ii). The resolution also acknowledged Deloitte’s commitment to reforming its risk management practices, as part of a broader settlement related to its audit failures at Adelphia Communications Corporation.

Enriched metadata

Scheme: accounting-fraud (95%)
Outcome: settled
Settlement: $375,000
Victim loss: $361,000

Classified accounting-fraud(confidence 95%). EDGAR detection: forms 10-K/10-Q/8-K/NT 10-K· recall 80% / precision 48%. detection rule →

Extracted insights

Dollar amounts 3

$375K $375,000 $100K–$1M
$375K $375,000 $100K–$1M
$361K $361,000 $100K–$1M

Entities 5

company deloitte & touche llp
person its financial statements
person katherine s. addleman
person richard p. wessel
agency Securities and Exchange Commission

Triples 27

Sec Charge Deloitte & Touche And Two Of Its Personnel
Sec Issue Order Instituting Public Administrative Proceedings Against Deloitte & Touche Llp
Deloitte & Touche Llp Fail Audit Of Just For Feet
Deloitte & Touche Llp Receive Audit Fees Of Approximately $361,000
Deloitte Accept Censure
Deloitte Pay $375,000 To Settle The Charges
Barry Consent To Denial Of The Privilege Of Appearing Or Practicing Before The Commission As An Accountant
Baker Consent To Denial Of The Privilege Of Appearing Or Practicing Before The Commission As An Accountant
Richard P. Wessel Say Auditing Firms And Their Personnel Are Responsible For Exercising Professional Care And Maintaining Skepticism In Auditing Financial Statements
Katherine S. Addleman State Shareholders Depend On Auditing Firms As A Check On The Honesty Of Management
The Order Find Deloitte Formerly Served As The Auditing Firm For Just For Feet
The Order Find Barry And Baker Assigned To Serve As The Engagement Partner And Audit Manager
Just For Feet Falsify Its Financial Statements
Just For Feet Improperly Recognize Unearned And Fictitious Receivables And Revenue From Its Vendors
Just For Feet Fail To Properly Account For Excess, Worthless And Obsolete Inventory
Just For Feet Fail To Disclose Problems With Excess Inventory
Just For Feet Improperly Record Value Of Display Booths Provided By Its Vendors As Income
The Order Find Deloitte, Barry And Baker Reasonably Should Have Known That Just For Feet's 1998 Financial Statements Had Not Been Prepared In Accordance With Generally Accepted Accounting Principles
The Order Find Deloitte, Barry And Baker Did Not Comply With Generally Accepted Auditing Standards (Gaas) In The Conduct Of Their Audit
The Order Find Deloitte, Barry And Baker Engaged In Improper Professional Conduct Within The Meaning Of Rule 102(E)(1)(Ii) Of The Commission's Rules Of Practice Through Repeated Instances Of Unreasonable Conduct
The Order Find Deloitte, Barry And Baker Did Not Respond Adequately To Indications That The Company Was Recognizing Unearned And Fraudulent Vendor Allowances As Income
The Order Cite Deloitte, Barry And Baker For Failing To Test Adequately The Company's Reserve For Obsolete Or Excess Inventory
The Order Cite Deloitte, Barry And Baker For Failing To Respond Adequately To Indications That Just For Feet Was Fraudulently Increasing Its Income Through Fictitious Purchases Of Display Booths From Its Vendors
The Order Find Deloitte's National Risk Management Program Identified Just For Feet As A High-Risk Client
The Order Find Deloitte Did Not Carry Out The Responsibilities Required By Such A Designation
The Order Censure Deloitte Pursuant To Rule 102(E)(1)(Ii) Of The Commission's Rules Of Practice
Deloitte Pay $375,000, To The U.S. Treasury

View original SEC press releasesec.gov

Extracted body text (4,736c)

SEC CHARGES DELOITTE & TOUCHE AND TWO OF ITS PERSONNEL FOR FAILURES IN THEIR AUDIT OF JUST FOR FEET FOR IMMEDIATE RELEASE 2005-66 Washington, D.C., April 26, 2005 - The Securities and Exchange Commission today issued an Order instituting public administrative proceedings against Deloitte & Touche LLP based upon its failed audit in 1999 of the fiscal 1998 financial statements of Just for Feet, Inc., a now-defunct shoe and sports apparel retailer once headquartered in Birmingham, Alabama, for which the firm received audit fees of approximately $361,000. The engagement partner, Steven H. Barry, CPA, and the audit manager, Karen T. Baker, CPA, were also charged. Without admitting or denying the Order's findings, Deloitte agreed to accept a censure and pay $375,000 to settle the charges, while Barry and Baker each consented to a denial of the privilege of appearing or practicing before the Commission as an accountant. They can apply for reinstatement after two years and one year, respectively. Richard P. Wessel, District Administrator of the Commission's Atlanta District Office, said, "Auditing firms and their personnel are responsible for exercising professional care and maintaining skepticism in auditing financial statements, particularly when the company is identified as having a high risk of potential fraud." Katherine S. Addleman, Associate Director for Enforcement in the Atlanta District Office, stated, "Shareholders depend on auditing firms as a check on the honesty of management. They are expected to respond appropriately to wrongdoing, adequately test the claims made by management and complete the work supporting the audit before issuing an audit report." The Order finds that Deloitte formerly served as the auditing firm for Just for Feet and assigned Barry and Baker to serve as the engagement partner and audit manager, respectively, for its audit of the company's 1998 financial statements. Just for Feet falsified its financial statements by (1) improperly recognizing unearned and fictitious receivables and revenue from its vendors, (2) failing to properly account for excess, worthless and obsolete inventory and to disclose problems with excess inventory, and (3) improperly recording as income the value of display booths provided by its vendors. These fraudulent financial statements were included in the company's annual report for fiscal 1998 and in two registration statements for the offering of securities filed with the Commission in 1999. The Order finds that Deloitte, Barry and Baker reasonably should have known that Just for Feet's 1998 financial statements had not been prepared in accordance with generally accepted accounting principles. The Order further finds that Deloitte, Barry and Baker did not comply with generally accepted auditing standards (GAAS) in the conduct of their audit and engaged in improper professional conduct within the meaning of Rule 102(e)(1)(ii) of the Commission's Rules of Practice through repeated instances of unreasonable conduct. Specifically, the Order finds that Deloitte, Barry and Baker did not respond adequately to indications that the company was recognizing unearned and fraudulent vendor allowances as income. The Order also cited Deloitte, Barry and Baker for failing to test adequately the company's reserve for obsolete or excess inventory and failing to respond adequately to indications that Just for Feet was fraudulently increasing its income through fictitious purchases of display booths from its vendors. The Order also finds that Deloitte's National Risk Management Program identified Just for Feet as a high-risk client, but Deloitte did not carry out the responsibilities required by such a designation. The Order censures Deloitte pursuant to Rule 102(e)(1)(ii) of the Commission's Rules of Practice. Deloitte agreed to pay $375,000, to the U.S. Treasury. The Order further notes that, in determining to accept Deloitte's offer, the Commission considered Deloitte's willingness to undertake measures to address deficiencies in its National Risk Management Program as detailed in another order issued simultaneously concerning Deloitte's audit of the financial statements of Adelphia Communications Corporation. The Order also denies Barry and Baker the privilege of appearing or practicing before the Commission as accountants with a right to apply for reinstatement, with respect to Barry, in two years, and, with respect to Baker, in one year. Contact Persons: Richard P. Wessel, District Administrator Atlanta District Office (404) 842-7600 Katherine S. Addleman, Associate Director of Enforcement Atlanta District Office 404-842-7682 http://www.sec.gov/news/press/2005-66.htm Home | Previous Page Modified: 04/26/2005

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