In February 2019, Deloitte Japan agreed to pay $2 million to settle SEC charges that it violated the agency’s auditor independence rules by issuing audit reports for an audit client at a time when a number of the firm’s partners and audit engagement team members maintained bank accounts with the audit client’s subsidiary. Under the SEC’s auditor independence rules, auditors are not considered to be independent if they maintain a bank account balance with an audit client that exceeds the amount insured by the FDIC or a similar insurer. The SEC also charged Deloitte Japan’s former CEO as well as the firm’s reputation and risk leader and director of independence, both of whom agreed to a settlement and have been suspended from appearing and practicing before the SEC as accountants.

• Inadequate Staffing – In March 2014, in connection with one of Deloitte Japan’s routine independence inspections, the firm’s former CEO provided materials indicating that he had held bank account balances with an audit client that exceeded the amount insured by the Deposit Insurance Corporation of Japan after he received lump-sum deposits of partnership compensation from the firm. The firm’s office of independence acknowledged that this was an independence violation but failed to complete the former CEO’s inspection until November 2014 due in part to inadequate staffing. The SEC order states that in March 2014, Deloitte Japan’s office of independence had 7.8 full-time equivalent employees, who dedicated approximately half of their time to independence matters.
• Inadequate Reporting – When Deloitte Japan completed the former CEO’s independence inspection, the firm’s office of independence reprimanded him via email and notified the relevant audit engagement team of the violation. However, the office did not identify the former CEO by name and led the engagement team to incorrectly conclude that the independence violation was not committed by someone within the chain of command who might affect the audit process. As a result, the existence of the former CEO’s independence violation was not fully disclosed to the relevant audit client until July 2015.
• Remedial Efforts and Cooperation – In July 2015, Deloitte Japan voluntarily disclosed to the SEC independence violations committed by the former CEO and other individuals. The firm also hired an outside law firm to conduct an internal investigation into the issue, which uncovered eighty-eight Deloitte Japan partners and audit engagement team members with personal financial relationship violations with respect to the audit client. Those individuals included the firm’s former CEO and its reputation and risk leader and director of independence. The SEC order notes that Deloitte Japan’s office of independence has since revised its policies and now identifies violators by name. The order further acknowledges that the office has “more than tripled” its staffing and it also describes Deloitte Japan’s cooperation efforts, including that the firm voluntarily shared the results, details, and documents related to its internal investigation, provided translations of key documents, and facilitated the voluntary testimony of overseas witnesses, all of which the SEC noted as having “reduced the time and resources necessary for the Commission staff to conclude the investigation.”

The SEC’s settlement order with Deloitte Japan and the two executives can be found here.

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