The Horribe Tech Services of Deloitte

I wrote about auditing scandals involving Deloitte Touche Tohmatsu Limited. I questioned why the Federal Reserve of New York renew the contract with Deloitte after auditing scandal with Adelphia Communications Corp. and companies based in China.

Apparently, government agencies updating their technical services have trusted Deloitte that has proved to be a grave error.

In 2003, the California court system hired Deloitte to connect the computer systems.

Officials hired Deloitte and another firm in 2003 to create a statewide case management system, connecting 58 county courts, as well as appellate courts. By 2010, Deloitte was running the entire job, and the contract had been amended 102 times, ballooning in cost to $310 million from $33 million, according to a state audit.

Worse, the cost to install the software had been wildly underestimated. The total price tag soared to a projected $1.9 billion, so expensive that the courts could not afford to put the system into operation.

The integrated computer system was to be called the California Court Case Management System. The California's Judicial Council ended the contract with Deloitte. The financial loss to California taxpayers is estimated to be $2 billion. Even if the system was installed it would soon be outdated. The worst part was reimbursed for $16 million when the contract was ended.

Deloitte once again had problems with in California in 2013. The state's unemployment website Employment Development Department was backlogged with 300,000 claims.

Now lawmakers want answers. The Assembly is setting up a hearing to determine what went wrong with a system that cost taxpayers $110 million, almost double the original estimate.

Some blame the EDD's slow response to the problem that created the massive backlog of claims. Others are pointing fingers at a familiar name around the halls of Sacramento: Deloitte Consulting.

State employees warned government officials that the system set up by Deloitte would not be ready. Their warnings were ignored. EDD was forced to admit to the Assembly Insurance Committee. CBS Sacramento reported as many as 600 people didn't receive payment on their unemployment claims.

Deloitte set up the unemployment claim system for Florida's Department of Economic Opportunity. Many people were not able to log into the system.

The main contractor of the project, Deloitte Consulting, won the bid to modernize Florida’s unemployment compensation system by beating out nine other firms. In early 2011, the company negotiated with Florida that it could do all the work for $39.8 million and finish by December 2012, a deadline it blew — badly.

As contracts go, this wasn’t a big one for Deloitte Consulting, a U.S. company that’s part of an international British conglomerate better known as Deloitte & Touche. Since 2007, Deloitte Consulting has won $283.4 million in contracts with Florida agencies. Gov Rick Scott has been rather unresponsive to complaints about the glitches in the unemployment website. One reason maybe it is because the lobbyist for Deloitte is Brian Ballard. Mr. Ballard served as Co-Chair of Governor-Elect Rick Scott's Inaugural Committee. Scott was a guest at Ballard's Super Bowl party. Don't expect Scott to say to end Deloitte's contract any time soon.

Revisiting the Financial Crisis: Why Did Federal Reserve of New York Resign Deloitte?

In February of 2007, the Federal Reserve of New York board extended the contract of international auditing company Deloitte Touche Tohmatsu Limited. Future Treasury Secretary Tim Geithner was President of the New York Fed at the time.

This is from a highly redacted press release of the yearly minute of Fed of New York meetings that I posted yesterday

Ms. Considine, Chair of the Audit Committee, reported that the Audit Committee had reviewed and approved the Reports of Audit Activities (# ) at the Bank during December 2006 and January 2007. Ms. Considine stated that the Committee had approved a request by the Bank’s Chief Compliance Officer to maintain an existing contract with Deloitte & Touche to provide consulting services related to the establishment of the Bank’s Compliance program after Deloitte & Touche becomes the Bank’s external auditor. She observed that the Bank’s control environment continued to be satisfactory, that no unfavorable audit opinions had been issued, and that the Bank’s Sarbanes-Oxley work was on track. She reported that the qualifications of the Audit Committee members had been reviewed and that Mr. Wait was designated as the Committee’s financial expert. Ms. Considine noted that the Committee also received presentations on the Bank’s Quarterly Operations performance and the Bank’s Ethics Program before going into a series of Executive Sessions, from which there were no issues that required the attention of the full Board of Directors.

I quick review of Deloitte on Wikipedia finds that the auditing agency has a history of incompetence and accusations of auditing fraud.

Adelphia Communications Corp. cable television company. The comany filed for Chapter 11 bankruptcy in 2002. Founder John Rigas and his son Timothy Rigas were convicted on 15 counts securities fraud.

The Rigases and Mulcahey were charged with hiding $2.3 billion in debt at the cable company, deceiving investors and stealing company cash to line their own pockets.

The children of John Rigases spent money lavishly on their lifestyle and personal projects. The Rigases family was moving money out of Adelphia and into other family owned businesses. The auditing company that was helping hide the money was Deloitte. The Securities and Exchange Commission settled with Deloitte for a $50 million fine. Deloitte's accounting on Adelphia was less than stellar.

Deloitte ran into problems in China in 2006. The China Securities Regulatory Commission and investors.

A source close to the China Securities Regulatory Commission (CSRC) revealed that it would likely hold an administrative hearing on April 7 to investigate the firm's role in a 2005 scandal involving Chinese refrigerator maker Guangdong Kelon Electrical Holdings Co, a former Deloitte client.

At the same time, a lawsuit was brought to Huangpu District Court in Shanghai on Wednesday, claiming Kelon investors had suffered losses because Deloitte issued unqualified financial reports while auditing Kelon's finances in 2004.

If the accusation is accepted next week, Deloitte will face trouble from both the court and the industry regulator.

In 2011, Deloitte was accused of fraud from short sellers in China. Forbes reports that the scandal made Deloitte resign from their services to Boshiwa International, Daqing Dairy, China Media Express and Longtop Financial.

With over 150 years of history and a truly global presence, Deloitte is arguably the most confidence-inspiring and relied-upon auditor in the world. However, Deloitte’s booming business in China has created significant headaches for Deloitte’s global brand. After an aggressive push into China, Deloitte now boasts more Hong Kong- and U.S.-listed Chinese public clients than any other auditor. But Deloitte was also the auditor of record for some of China’s biggest fraud implosions. With both China Media Express and Longtop Financial, many investors felt that the Deloitte stamp of approval on prior years’ financial statements meant that substantial fraud was a near impossibility. Deloitte’s abrupt resignation from both companies following short-seller accusations of fraud made the financial losses for investors that much more painful to accept.

Since the 2007 Federal Reserve of New York resigning Deloitte the auditing agency has been accused of fraud on numerous occasions. The most serious is the New York state Department of Financial Services claiming that Deliotte helped Standard Chartered money launder for Iran.

The DFS said that one senior Deloitte partner admitted that he “watered down” a report compiled for the regulator because the situation was too politically charged.

The New York regulator also claimed that in 2005 Deloitte “unlawfully” gave the British bank confidential reports that it had prepared for two other foreign banks, also under investigation for money-laundering activities.

Deliotte does more than just basic accounting. I wonder what kind of financial reports did Deliotte (if any) did they do for the Fed of New York before the financial crisis of 2008. Looking back it seems like poor judgement for Tim Geithner to retain the services of Deliotte.