According to an Order Instituting Disciplinary Proceedings, Making Findings and Imposing Sanctions (PCAOB Release No. 105-2018-020), the Public Company Accounting Oversight Board (PCAOB) censured Deloitte LLP for its failure to satisfy applicable independence rules for three (3) audit engagements (2012, 13, and 14) performed for Banro Corporation, a Canadian gold mining company / issuer listed on the New York Stock Exchange. The PCAOB imposed a $350K fine on the firm and requirement to conduct a review of its independence policies and procedures, including independence training.
Deloitte Canada (Deloitte CA), a Deloitte "associated entity" (affiliate) led the audits of Banro. The violation arose on two fronts, which occurred during the audit and professional engagement periods:
- In 2012, a managing director of Venmyn Deloitte, a mining services company, prepared a valuation of a Banro gold mine (report) that the Deloitte CA engagement team relied on in performing its audit. Venmyn Deloitte (an associated entity of Deloitte LLP via Deloitte-South Africa's acquisition in 2012) also consented to the report's use in Banro's annual report filed with the SEC. In 2013 and 2014, the managing director prepared additional valuation reports, which were again relied on by the Deloitte CA audit team.
- For each of the three (3) audit years in question, the managing director publicly took responsibility for the valuation reports, which was reiterated in Banro press releases containing gold mineral resource and reserve estimates included in those reports.
With respect to 1 above, the PCAOB concluded that Deloitte CA audited its own work by relying on reports prepared by an employee of Venmyn Deloitte, an associated entity. See Rule 2-01(c) 4(iii), Appraisal or valuation services, fairness opinions, or contribution-in-kind reports.
With respect to 2 above, the PCAOB concluded that Venmyn Deloitte's public disclosure of responsibility for the valuation reports and related press releases created a mutuality of interests between Deloitte CA and Banro that those reports were correct. See Rule 2-01(b), which describes the SEC's general standards rule.
In total, the PCAOB found that Deloitte CA violated Rule 3520, Auditor Independence with respect to these engagements.
So what happened?
According to the Order there were discussions between Venmyn Deloitte and Deloitte CA's national office about whether preparing the report would impair the firm's independence. After discussion though in which the managing director asserted that Venmyn Deloitte would "use information provided by Banro to recalculate management's estimates of the mineral resource levels..and determine whether they were valid," it was agreed this would not impair independence. The Order counters that there was no consideration of:
- the report's preparation in accordance with Canadian statutory requirements
- the managing director serving as the "qualified person" taking responsibility for the report which is filed with the SEC
- the managing director's public taking of responsibilities for management's gold resource or reserve estimates in Banro press releases
How was the independence issue identified?
According to the Order:
In 2014, Deloitte Canada was inspected by the PCAOB's Division of Registration and Inspections ("DRI"), and the Banro 2013 Audit was selected for review. In early 2015 as part of this inspection, DRI communicated to the Firm its independence concerns as to the non-audit services provided, and related public statements made, by the Managing Director and Venmyn Deloitte in connection with the 2013 Lugushwa Report and 2014 Namoya Report.
As a result of the DRI concerns, Deloitte CA reconsidered the impact of the valuation reports on the firm's independence and again concluded that independence had not been impaired.
Obviously, the PCAOB disagreed and the rest is now history.