The pair were found to have contributed to the firm’s failure to cooperate with a PCAOB investigation. This resulted in the board taking out an enforcement order against Deloitte Brazil which revealed that the firm and several individuals had attempted to cover up audit violations – including improper alteration of documents and provision of false testimony to investigators.
“The order announced today against the former chairman of Deloitte Brazil makes clear that the misconduct at the firm went all the way to the top, and our investigation persisted until we uncovered the extent of wrongdoing,” said Claudius Modesti, director of PCAOB enforcement and investigations.
“The order against the former CEO demonstrates that individuals who refuse to cooperate with board investigations face some of the stiffest sanctions.”
Morrell, who retired in June 2016, was chairman of the governing body of Deloitte Touche Tohmatsu Auditores Independentes (Deloitte Brazil). As such, he oversaw the governance of the firm and the compliance of the partners with the law and firm policies and procedures.
In October 2013, the PCAOB sent a request to Deloitte Brazil as part of an informal enquiry, asking the firm to produce the work papers from its 2010 audit of Gol Linhas Aéreas Inteligentes SA.
The firm did come up with a set of papers but they had been improperly altered in connection with a 2012 PCAOB inspection of the audit.
According to the board’s disciplinary order, the firm did not disclose that they had been altered which had been done to conceal deficiencies in the 2010 audit.
In March 2014, Morrell had conversations with two senior Deloitte Brazil partners in which he learnt about the production of the improperly altered work papers and agreed to back their decision not to inform the PCAOB.
He later had a conversation with another senior partner and once again agreed not to disclose the alterations.
In July 2010 the PCAOB issued an order of formal investigation and the firm continued to provide false documents and information. Morrell was aware that the firm was failing to cooperate with the investigation but did not take any steps to change the situation or encourage the firm to admit to hiding the improper alterations.
Given Morrell’s position as chairman of Deloitte Brazil’s governing body, the PCAOB order states, “his acts and omissions directly and substantially contributed to the firm’s failure to cooperate” with the PCAOB.
“Morrell knew, or was reckless in not knowing, that his actions and omissions played a direct and substantial role in the firm’s non-cooperation.”
He was censured, fined $35,000 (£28,194) and barred for five years from being an associate of a registered public accounting firm.
As far as Araújo is concerned, he retired from the firm in July 2016 after rotating out of the positions of chief executive and managing partner. In those roles he also served on the governing body and on the executive committee.
In October 2016, the PCAOB issued an accounting board demand (ABD) requiring him to appear to give testimony on 3 November about his knowledge of or participation in the firm’s provision of false documentation and information relating to the Gol audit.
Araújo asked to change the date, which the board agreed to do, but then he informed them through his lawyer, that he would not be giving evidence in compliance with the ABD and so would not be cooperating with the investigation.
The board ordered him to be censured and barred him for life from being an associate with a registered accountancy firm. This means that he cannot be associated with any issuer, broker or dealer in an accountancy or financial management capacity without the PCAOB or the Securities and Exchange Commission’s consent.
Both men agreed to settle the charges without admitting or denying the findings.
In December last year, Deloitte Brazil was fined $8m, censured and ordered to appoint an independent monitor to oversee improvements to its system of quality control.
It also agreed to immediate practice limitations, including a ban on accepting certain new audit work until the independent monitor confirms its progress in achieving a range of remedial benchmarks.
The PCAOB said at the time that there were 12 Deloitte Brazil partners and other audit personnel involved in the case who had been sanctioned. They included the risk and reputation leader, the national professional practice director and the audit practice leader.
The board also revealed that it had been tipped off about the firm obstructing its investigation by a senior manager on the audit.