Case 4-10 Navistar International
In a bizarre twist to a bizarre story, on October 22, 2013, Deloitte agreed to pay a $2 million
penalty to settle civil charges—brought by the Public Company Accounting Oversight Board
(PCAOB)—that the firm violated federal audit rules by allowing its former partner to continue
participating in the firm’s public company audit practice, even though he had been suspended
Deloitte said that it had taken “several significant actions to restrict the deployment” of
Anderson. “However, we recognize more could have been done at that time to monitor
compliance with the restrictions we put in place.”2
In January 2013, Deloitte had settled a lawsuit alleging it committed fraud and negligence,
forcing Navistar to restate earnings between fiscal year 2002 and the first nine months of 2005.
Deloitte spokesman Jonathan Gandal expressed the firm’s position as follows:
“A preliminary review shows it to be an utterly false and reckless attempt to try to shift
responsibility for the wrongdoing of Navistar’s own management. Several members of
Navistar’s past or present management team were sanctioned by the SEC for the very matters
alleged in the complaint.”4
Ethical Obligations and Decision Making in Accounting, 4/e 2
case, the fraudulent accounting scheme was nearly impossible to detect because the company
failed to book items or provide information about them to the auditors.
It took Navistar five years to sue Deloitte. That seems like an unusually long period of time and
raises suspicions whether the company waited until its own problems were resolved with the
SEC. Perhaps Navistar thought if it had sued Deloitte while the SEC investigated, it might be
my watch” attitude, or possibly a heads–up on interest by the SEC in some of Navistar’s
accounting, this new partner cleaned house. Many prior agreements between auditor and client
and many assumptions about what could or could not be gotten away with were thrown out.
One problem for Navistar was that it was too dependent on Deloitte to hold its hand in all
accounting matters, even after the SOX prohibited that reliance. According to Navistar’s
complaint, “Deloitte provided Navistar with much more than audit services. Deloitte also acted
The audit committee’s role is detailed in the 2005 10-K filed in December 2007:
“The audit committee’s extensive investigation identified various accounting errors, instances of
intentional misconduct, and certain weaknesses in our internal controls. The audit committee’s
investigation found that we did not have the organizational accounting expertise during 2003
through 2005 to effectively determine whether our financial statements were accurate. The
investigation found that we did not have such expertise because we did not adequately support
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Questions
1. Use the Six Pillars of Character to assess the ethical values and decisions made by
Navistar and Deloitte in the case.
This case discusses a complex and high risk audit engagement. The case looks at the
consulting and auditing of complex audit issues.
The six pillars include honesty, integrity, trustworthiness, fairness, responsibility, and
civic duty. From had an AICPA Code perspective, Deloitte had a duty and obligation of
independence and due care in conducting the audit. Deloitte had consulted on the
accounting treatments used by Navistar and may not have been objective in auditing
those treatments. From a utilitarian perspective, the interests of all stakeholders were not
considered; just the interest of the management. Using rule-utilitarianism, GAAP and
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2. Evaluate the deficiencies in internal controls and corporate governance at Navistar.
Do you believe external auditors should be expected to discover fraud when a
company, such as Navistar, is so poorly run that its personnel did not have the
necessary training and expertise, its internal controls were deficient, and it relied
too heavily on Deloitte to determine GAAP compliance? Explain.
Navistar’s explanation that its problems were due to complicated accounting under SOX
is weak at best. The company has ultimate responsibility for its financial statements and
to ensure that the internal controls are operating as intended. This clearly did not exist in
the case. The company can’t blame Deloitte for its failings. In fact, these shortcomings
made Deloitte’s work infinitely more challenging.
The side agreements with suppliers that received rebates was not Deloitte’s idea. The
improper booking of income from tooling buybacks was not a technique developed by
Exhibit 3.6
Initial Detection of Occupational Frauds from the ACFE 2014 Global Survey: Report to the
Nations on Occupational Fraud and Abuse
Detection Method
Percentage Reported
Median Loss
Tip
42.2%
$149,000
Management Review
16.0%
$125,000
Internal Audit
14.1%
$100,000
Account Reconciliation
6.6%
$75,000
Document Examination
4.2%
$220,000
External Audit
3.0%
$360,000
Surveillance/Monitoring
2.6%
$49,000
Notified by Law Enforcement
2.2%
IT Controls
1.1%
$70,000
Confession
0.8%
$220,000
Other
0.5%
N/A
We can see that about 30 percent of all fraud are detected by management review and
3. Discuss the deficiencies in the work done by Deloitte for Navistar with respect to the
AICPA Code of Professional Conduct.
Risk assessment is a critical evaluation made by auditors. It appears that Deloitte failed to
consider the risks in the Navistar audit. The firm may have been more concerned with
auditing a major client rather than doing its due diligence in assessing risk at and during
its audits.
Extended Discussion
Adding to the facts of the case, the 2002 – 2004 audits of Navistar had unqualified audit
opinions when the financial statements were materially misstated. That is the definition
that many use for a failed audit. Did Deloitte fail to perform an audit with due care? Did
Deloitte plan and perform the audit to test and detect material mistakes and
misstatements? Was the firm sufficient skeptical of the evidence provided by Navistar
management? These are the factors to consider in determining whether a business failure