Deloitte Settles Adelphia Audit Case for $50 Million

Deloitte & Touche agreed Tuesday to pay $50 million to settle charges that it failed to detect a massive accounting fraud at Adelphia Communications Corp., a company that it deemed one of its riskiest clients.

The payment to end charges filed by the Securities and Exchange Commission is the largest yet to be levied on an auditing firm in the aftermath of the accounting scandals of the last decade. The money will be used to compensate people who lost money when the cable system operator collapsed.

“When auditors turn a blind eye toward misconduct on a high-risk client and allow a fraud of this magnitude to go undetected, the consequences will be severe,” said Mark Schonfeld, director of the SEC’s Northeast regional office.

Deloitte & Touche was accused of improper professional conduct by failing to detect fraud when it reviewed Adelphia’s books for the 2000 fiscal year. The cable company, based in Greenwood Village, Colo., filed for bankruptcy protection in 2002 after revelations that the controlling Rigas family had borrowed almost $2.3 billion using Adelphia’s credit.

Adelphia and members of the Rigas family agreed Monday to settle separate charges stemming from the fraud. Company founder John Rigas and his son Timothy were convicted of conspiracy, bank fraud and securities fraud last year.

Deloitte & Touche separately agreed to pay $375,000 to settle charges that it failed to stop accounting fraud at Just for Feet Inc. in its 1998 audit of the sports retailer, before the company filed for bankruptcy protection. Steven Barry, the accountant on the audit, agreed to a ban of at least two years from practicing as an auditor before the SEC, and Karen Baker, the audit manager, agreed to a ban of at least one year.

Deloitte & Touche agreed to both settlements without admitting or denying wrongdoing.

“These cases raise a larger issue facing the auditing profession,” Deloitte & Touche Chief Executive James Quigley said. “Among our most significant challenges is the early detection of fraud, particularly when the client, its management and others collude specifically to deceive a company’s external auditors.”

Deloitte & Touche also agreed to fortify a risk management program already in place.

New York-based Deloitte & Touche is the U.S. arm of Deloitte Touche Tohmatsu.