How Deloitte masked scandals in business and politics

Attired in khaki shorts and gray t-shirt, Donald Bayne is at his desk flipping through an evidence binder that contains internal government emails, reading a selection of them aloud. The lawyer is in his cluttered corner office at Bayne Sellar Ertel Carter, a downtown Ottawa law firm, located just around the corner from city hall.

“Senator Gerstein confirmed that his channel into Deloitte is open and is happy to continue assisting us,” Bayne reads to me at one point.

Tanned, with snowy-white hair and the trim build of someone who runs triathlons, the 73-year-old Bayne is one of Canada’s top criminal attorneys. He’s arguably most famous for defending Mike Duffy during the senator’s 2015-’16 trial for fraud and bribery – leading to Duffy’s acquittal.

While researching a story about auditors for The Globe and Mail, I had traveled to Ottawa last spring to meet with Bayne to discuss an overlooked aspect of the Duffy case – specifically the role played by Deloitte, Canada’s largest auditing and management consulting firm. I was trying to find out if an audit commissioned by the Senate into Duffy's expenses, which was carried out by Deloitte, was truly objective – and how its findings were leaked to senior members of former Prime Minister Stephen Harper’s inner circle before the Senate saw them.

Bayne told me the evidence was clear that “(the audit’s) independence was improperly breached.”

“So it was fiction this was an independent audit?” I pressed.

“Right… This was a whole compulsive, coercive, false scenario of pulling one on the Canadian public,” Bayne replied.

Big Four have evolved into huge conglomerates

The story of Deloitte and the Duffy affair is important because it highlights how the Big Four auditing giants can be open to corruption and political influence. And how they’re often not objective or neutral.

Deloitte is the largest of the Big Four – which also includes KPMG, Ernst & Young and PricewaterhouseCoopers (PwC). Together, these four firms form a powerful cartel that wields tremendous clout in the finance, business and government circles worldwide. Their influence seeps into every aspect of the economy.

Indeed, collectively, the Big Four audit 490 of the S&P 500 companies. In turn, they’ve evolved into huge conglomerates themselves – with combined 2017 revenues of US$134-billion, employing 945,000 people around the world. In fact, according to Forbes, Deloitte is the fourth-largest private company in America.

Moreover, the Big Four are important because modern societies rely on accountants to verify financial records for shareholders, thereby safeguarding the economy at large. “An audit is about a public good,” says Natasha Landell-Mills, a partner with the London, UK-based investment firm, Sarasin & Partners LLP, and a critic of the profession.

Today, however, the Big Four are facing a crisis of credibility of their own making, embroiled in scandal after scandal in multiple jurisdictions. Increasingly, they stand accused of turning a blind eye, and even enabling, corporate fraud and questionable accounting. They’ve also emerged as central players in the creation and abuse of offshore tax havens. And they've become champions of the privatization of government services. And yet they “perform their duties with relative impunity,” writes Richard Brooks, a British journalist in his recent book, Bean Counters: The Triumph of the Accountants and How They Broke Capitalism. “They are free to make profit without fearing serious consequences of their abuses.”

In Canada, court cases, scandals and insights from experts suggest Deloitte is the most egregious of the lot. “Deloitte sells the public an image that they are wonderful, they’re up-to-date, they are professional, they are experts,” says Prem Sikka, an accounting professor at the University of Sheffield in the UK whom I spoke to when researching my Globe article. “But at the same time, there is a dark side.”

Forced to pay almost $200-million for frauds they missed

Founded in the UK in the late 1800s, Deloitte is now a privately-held giant with global revenues of (US) $43.2-billion, 264,000 employees in 150 countries and headquartered in London, England.

The company says it has a global impact by championing communities and creating opportunity through more than US$217 million in investments during the 2018 fiscal year through donations, volunteering, pro bono work and management costs. The Deloitte Foundation also runs projects such as fundraising for charitable causes, environmental protection, and community investment.

Like all of the Big Four, Deloitte is not only an auditing firm, but offers management consulting, legal and IT services, as well as conducting corporate investigations.

Yet all of Deloitte’s subsidiaries are locally and independently controlled. As a result, Deloitte Canada is owned by its 957 Canadian partners. With 9,947 employees, 60 locations and annual revenues of $2.3-billion, Deloitte Canada is headquartered in a shiny new blue-glass and steel tower in downtown Toronto. Lately the firm has been shelling out a lot of money for its screw-ups. Over the past three years, Deloitte Canada has paid almost $200-million in damages due to its failure to warn investors about corporate frauds in the cases of Livent, Philip Services and Mount Real. Given that Deloitte is self-insured, this money had to be paid directly from the pockets of its own partners.

The company likes to paint itself as a progressive employer. In 2017, Deloitte Canada’s CEO, Frank Vetesse, wrote an op-ed in the Globe and Mail entitled “White on Bay Street: Corporate Canada must do more” in which he urged captains of industry to be more inclusive towards women and visible minorities.

Ironically, the piece was penned while Deloitte was the target of a lawsuit that accused the firm of being insensitive on these very matters.

In 2014, Deloitte bought a Toronto-based company, ATD Legal Services Professional Corp., which offers law firms document review services for a lower cost than they pay articling students. ATD hires lawyers to do this work – more than 400 people during the period of the lawsuit’s class period. But after Deloitte bought ATD, they cut lawyers’ wages from $50 an hour to as low as $43, while declaring they were independent contractors instead of employees. In so doing, Deloitte said the lawyers were not entitled to certain benefits.

Andrew Monkhouse, the Toronto lawyer spearheading a $20-million lawsuit against Deloitte on this matter, says a large portion of the ATD lawyers were minorities and women. “It’s very much higher skewed percentage-wise to visible minorities and women at document review companies versus the average Bay Street law firm,” he says.

As a result of the suit, Deloitte has reinstated the original wage and paid back some money to the lawyers. The lawsuit is continuing and its allegations have not been proven in court.

Turning a blind eye to corporate criminality

Deloitte’s biggest failing is not calling corporate clients out on their bad behavior, often costing shareholders vast fortunes. In fact, Deloitte has a long history of missing serious criminality under its nose.

In 1997, Deloitte was asked to do an audit of YBM Magnex Inc., an industrial magnet company headquartered in Pennsylvania, prior to it raising money from investors on the Toronto Stock Exchange (TSE). By then, YBM had fallen under suspicion that it might be a fraud.

Yet Deloitte issued a report that gave YBM a clean bill of health, the New York Times reported in 1999.

“Deloitte was engaged to do a high risk audit so they were put on notice that there were concerns,” notes Joe Groia, a Toronto securities lawyer. “So they went in with their eyes wide open.” After Deloitte gave YBM its seal of approval, the company raised $150-million from investors.

When evidence and rumours of YBM’s ties to organized crime intensified, Groia was hired by YBM’s board to investigate in the summer of 1998. He quickly discovered the company was controlled by the violent “boss of bosses” of the Russian mafia, Semion Mogilevich (who was soon near the top of the FBI’s most wanted list). Deloitte had failed to discover Mogilevich's involvement with YBM. “Certainly based on the work we did I was surprised that Deloitte did not uncover a number of the problems that we uncovered,” says Groia. YBM collapsed soon afterwards, after raising about $890 million from its shareholders. Most of these funds were lost.

Philip Services Corp. was a $1.7-billion Hamilton, Ont.-based industrial services company that went insolvent in 1998. Deloitte had been auditing its books for seven years. One reason Philip got into trouble was one of its executives concocted a fraud to siphon money into companies he owned, enriching himself to the tune of $18-million. The company also admitted $90-million of copper had gone missing. Yet Deloitte failed to notice the scam and other problems (the executive was eventually sent to prison). As a result, Deloitte was sued by Philip’s lenders, including CIBC and the American billionaire Carl Ichan — who had bought up Philip’s debt - saying they relied on Philip’s flawed financial statements before investing in the company. The lawsuit was fought over for 17 years before Deloitte settled it for a whopping $122-million two years ago.

Then there was Mount Real Corp., a Montreal-based financial management company run by Lino Matteo, a highly controversial businessman who was also embroiled in the Cinar fraud.

Matteo attracted 1,600 investors to Mount Real’s promissory notes, mostly seniors who handed over $70-million on promises of fantastic returns. Yet, from 1987 until it collapsed in 2006, Mount Real was a Ponzi scheme. Deloitte was Mount Real’s auditor for 10 of those years, from 1991 to 2002 (overseen by a Montreal-based partner, Angelo Bracaglia, for at least four years). To this day, there’s no evidence any of the investors’ money was actually ever invested.

Yet Deloitte and other auditing firms signed off on Mount Real's books, despite the fact “the glossy financial statements... masked a catastrophic financial situation," according to a 2014 class action lawsuit launched on behalf of the firm's investors against Deloitte and the other auditors involved. This suit was settled for $43-million in 2016.

In 2017, Matteo was sentenced to five years in prison and hit with a $4.9-million fine. Bracaglia, however, received a five-month suspension last winter – and a fine of $70,000 - by CPA Quebec, the accountants’ regulatory body, and still works for Deloitte. The firm did not respond to a question about this affair. And when contacted, Bracaglia referred questions to Deloitte's media people.

More recently, Deloitte failed to carry out one of the jobs that auditors are supposed to do – warn shareholders if a company is about to go bust.

In the spring of 2015, Sears Canada Inc. received a document from some of its former executives entitled “Why Sears Canada is Insolvent” explaining how the retail chain was technically bankrupt, especially given the company’s books were failing to register hundreds of millions in liabilities. “Sears has no reasonable expectations of future profits,” the report said. The executives were concerned about the employees' pension plan, which was being underfunded and relied on by 18,000 retirees. However, Sears dismissed their concerns.

Sears Canada’s problems largely stemmed from its owner, Edward “Crazy Eddie” Lampert, a controversial American hedge fund billionaire who took control in 2005. Lampert was accused of asset-stripping the company – including paying out $2.9-billion in dividends to himself and other shareholders. Without the cash to modernize, Sears Canada had gone into decline.

In the spring of 2017, Sears Canada issued its annual report, with the company insisting it would be a “going concern” for at least 12 more months. Deloitte, as the company’s auditor, did not dispute this prognosis, which it should have done if it felt otherwise.

Eight weeks later, Sears Canada filed for insolvency, and began to liquidate its assets.

In fact, not once since the former Sears executives issued their warning in 2015 had Deloitte suggested Sears was in peril. “On the surface it doesn’t look like (Deloitte) exercised professional skepticism,” remarks Dimitry Khmelnitsky, head of accounting at Veritas Investment Research Corp., a Bay Street forensic accounting firm. “That’s the role of the auditor – to be skeptical, obviously.” Deloitte did not respond to a question on this matter.

Promoting a tax evasion scheme

The Big Four have played a critical role in the explosion of corporate tax evasion and avoidance. “(The Big Four) have been key drivers of both the offshoring of individual tax liabilities and the creation of questionable structures for multinationals for decades,” explains Alex Cobham, chief executive of the Tax Justice Network in the UK.

In Canada, KPMG has been called out for helping companies and wealthy individuals avoid taxes by using offshore tax havens. But Deloitte has played a part, too.

According to a court filing, Deloitte Canada concocted a tax avoidance scheme in the early 2000s. The way it worked was that certain Deloitte clients, working with a British brokerage house, would claim losses on foreign currency trades. The clients would then use the losses to report a drop in income – thereby owing less in taxes. Deloitte, in turn, skimmed a 20 per cent fee from the tax savings.

In one instance, four Deloitte clients claimed foreign currency losses totaling $25.8-million in computing their incomes for the 2003 taxation year. The total tax savings for the four was over $1.2-million.

In 2004, a CRA auditor stumbled across Deloitte’s scheme and began auditing the four clients who had exploited it. The auditor soon realized Deloitte had at least five other clients who’d taken advantage of the plan. After Deloitte refused to divulge their names, the CRA went to court to find out who they were – with Deloitte strongly resisting.

In 2009, just as the case was about to go to court again, the CRA suddenly dropped the case. Today, the CRA refuses to say why, claiming in a statement that "the confidentiality provisions of section 241 of the Income Tax Act prevent the CRA from discussing specific cases" although other sources say it was due to Deloitte’s political influence in Ottawa.

Deloitte embroiled in political scandals

This would not be surprising. Deloitte wields tremendous political clout, and makes a lot of money selling services to governments.

In Ottawa, Deloitte is the largest recipient of federal government contracts of the Big Four. Between 2006 and 2012 alone, Deloitte was awarded more than $135-million in contracts. Deloitte even hired David Johnston, the retiring governor-general, to be an executive adviser in 2017. Deloitte often conducts projects in conjunction with the Auditor-General of Canada.

Yet in the political realm, Deloitte frequently ends up at the centre of scandals.

In 2017, when Kathleen Wynne was still Ontario’s premier, she faced a political problem: hydro rates had been rising for years. Going into an election last summer, the Wynne government decided to cut hydro rates by 25 per cent to quell discontent. It was called the “Fair Hydro Plan.”

But the government had also promised to balance its books. By cutting hydro rates, it would have to borrow money to make up the shortfall and therefore increase the deficit. “They had to find a way to lower the hydro cost,” says Randy Hillier, a Conservative MPP who was sitting on the province’s public accounts committee, “and not appear to be adding to the debt.”

The Independent Electricity System Operator (IESO), which manages Ontario’s electrical system, was tasked with making the hydro rate cut vanish from the province’s books. In turn, IESO hired Deloitte, KPMG and E&Y. The auditing firms suggested rate-regulated accounting as the solution, which allowed the province to kick the cost of the hydro cut down the road to future ratepayers.

But this plan came with a hefty price tag – it would add $4-billion in additional interest costs to the province’s budget over 30 years.

When Bonnie Lysyk, Ontario’s auditor general, learned of this, she was livid, arguing the scheme violated government accounting standards and was designed to hide how much money was really being borrowed. Hillier, meanwhile, believes the rate-regulated accounting “demonstrates a complete lack of integrity by the accounting firms. (It) was dishonest from the get-go. Here we had the Ministry of Energy and the IESO purposefully, in laymen’s terms, hoodwinking the public and engaged the three (auditing) firms – which were paid significant sums – to create the scheme to hoodwink the public.” Deloitte declined to answer questions about its involvement in the hydro rate cut.

Deloitte leaks audit results to PMO in Duffy affair

Then there was the Mike Duffy affair. In late 2012, the Tory senator found himself the focus of questions about whether he was abusing his Senate expenses.

The Senate’s committee of internal economy hired Deloitte to conduct an audit of Duffy’s expenses to ascertain whether they were appropriate. At the time, the committee said the Deloitte audit would be fully “independent”, conducted with the “strictest confidentiality".

Hiring Deloitte was a conflict of interest, however: Deloitte is auditor for both the Conservative Party and its fundraising arm, the Conservative Fund of Canada, which was chaired by then Senator Irving Gerstein.

Soon after Deloitte was hired, Prime Minister Stephen Harper’s inner circle decided to engage in damage control over the growing Duffy controversy. Nigel Wright, Harper’s chief of staff, set out to shut down the inquiry and Deloitte’s audit – or at the very least influence its outcome. Wright dispatched Gerstein to ask Deloitte to kill the audit, and failing that, script its conclusions. Gerstein, who had no authority to intervene, complied.

Gerstein contacted Michael Runia, an Ottawa-based senior partner at Deloitte (who is now a managing partner). Gerstein knew Runia because the Deloitte partner oversaw the audits for both the Tory party and its fundraising arm. Runia was also a donor to the Conservative Party.

Duff Conacher, director of Democracy Watch, an Ottawa-based NGO, says when Gerstein contacted Runia, “he should have told Gerstein he can’t even talk about it at all, and secondly (Runia) should have filed a complaint with the Senate’s ethics officer that Gerstein was improperly trying to further the interests of Senator Duffy by trying to rig the audit results.”

Instead, Runia agreed to look into the matter and contacted Gary Timm, one of the lead auditors on the Duffy file. Timm later testified he had only one brief conversation with Runia, informing Runia the audit would continue and could not divulge any information about it.

Nevertheless, Timm decided against informing the Senate about Runia’s attempted interference.

However, emails later gathered by the RCMP show that someone within Deloitte fed Gerstein regular updates on how the audit was progressing. They also revealed that Gerstein personally held at least one meeting and was in constant phone contact with someone at Deloitte for weeks, trying to impact the audit’s conclusion. One PMO staffer wrote in an email that Gerstein’s “channel into Deloitte is open and happy to continue assisting us” with “our goal” of having Deloitte state “that their work is done.”

In fact, more than a month before the audit was published, someone within Deloitte leaked to Gerstein that the audit would find no conclusion on Duffy’s residency (and therefore no finding of inappropriate expenses). In other words, weeks before the audit was officially wrapped up and its conclusions delivered to the Senate - “the PMO/Senate leadership backroom conspirators had the gist of the report,” noted Justice Charles Vaillancourt in his 2016 ruling on Duffy’s case.

Today, says Duffy’s lawyer, Donald Bayne, this suggests “an absolute breach of (Deloitte’s) confidentiality and the terms of the retainer.”

Later in 2013, the Senate’s committee of internal economy asked Deloitte’s auditors to appear before them to find out what happened. Tory senators, however, blocked Runia from testifying before the committee.

Efforts by the National Observer to contact Gerstein through the Conservative Party and Mount Sinai Hospital, where he has long been a presence on its board, proved unsuccessful. Deloitte refused to answer any questions about the Duffy audit, and Runia also did not respond to a request for an interview.

Duffy was found innocent of all 31 charges of fraud, breach of trust and bribery in 2016.

This was not Deloitte’s only foray into Tory politics, however.

In 2017, the firm was hired by the Conservatives to oversee voting for its leadership race. The ballots were overseen by Deloitte and stored at one of its offices north of Toronto. Two days after Andrew Scheer won in a squeaker over Maxime Bernier, it was discovered there was a mysterious discrepancy of 7,466 votes. Yet the party's chief returning officer ordered all of the ballots destroyed before a recount could occur.

Bernier's supporters were outraged, inferring foul play, especially over the destroyed ballots. The party's president rushed out to defend the vote, saying the results had been “audited” by Deloitte.

This, however, was not true – Deloitte’s contract did not say the firm must audit the vote.

A current senator with ties to the Tories, speaking on condition of anonymity, says the Conservatives use “the cachet of Deloitte as a kind of Good Housekeeping seal of approval and nobody knows what the real story is.” The controversy has lingered: this past April, Bernier released a book in which he suggested Scheer manipulated the vote by signing up temporary members in Quebec. Deloitte, meanwhile, has remained mute on the matter. Scheer did not respond to Bernier's allegation.

Deloitte was also involved in the counting of ballots during the Ontario PC party leadership race last winter, after former leader Patrick Brown stepped down over allegations of sexual impropriety. The leadership race, won by Doug Ford, also ended in controversy after the voting procedure was found to have been plagued with glitches.

In the middle of the voting, Ford’s biggest opponent, Christine Elliott, declined to concede to Ford, citing "serious irregularities" in the race. In a statement, her team said she had won the popular vote and a majority of ridings, and alleged that thousands of votes had been incorrectly assigned to the wrong ridings. Again, Deloitte refused to comment on the matter.

Is Deloitte shaking down companies?

Deloitte’s political power may have prevented the firm from being held to account in another scandal.

Gregarious with a cutting wit, relaxing with a coffee by his fireplace in his basement office, 69-year-old Brian Love has spent more than 40 years in the scrap business. “It’s a rough and tumble industry,” he tells me. Love and his wife live in semi-retirement on a pleasant cul-de-sac in Grimbsy, Ontario. I went to see them last summer when I was researching my auditors story for The Globe and Mail.

Love’s entanglement with Deloitte suggests something alarming – that the auditing firm engages in shakedowns of companies.

In 1999, Love founded Mida International Inc., an electric waste recycling company in Burlington, Ont. It was a success, employing 72 people at its peak. But in 2012, the Ontario government lowered the price it was paying for recycled electrical waste and Mida began losing $500,000 a month.

Love decided to shut down his business, although Mida was not in default of its loans and paying back his debts was not in question (his receivables were insured). “Mine was not a bankruptcy,” explains Love. “What I wanted to do was wind my business up.”

In the summer of 2013, he informed his bank, HSBC, of his plans. One morning soon afterwards, Rob Biehler, a partner with Deloitte, showed up at Love’s office unannounced. “I represent HSBC and we are to be handling the bankruptcy,” Love recalls Biehler saying. HSBC had appointed Deloitte as its consultant on the file.

Love says Biehler told him HSBC wanted a court-appointed receivership – which is far more expensive but also unnecessary where there’s no issue of paying back creditors. Love was surprised Deloitte was even involved, given he'd already asked an insolvency trustee to oversee the wind up.

Love hired a lawyer and successfully fought off the attempt to have his receivership court-appointed.

Soon afterwards, Love, Biehler and the insolvency trustee held a meeting. Love and the trustee recall a discussion that Deloitte’s fee would amount to between $30,000-$40,000 – and at most $50,000. Biehler failed to inform Love, however, that Deloitte or HSBC had hired a law firm to consult on the file, which would add considerably to the cost. Nor did Biehler inform Love that the Deloitte partner would be charging $550 per hour for his services.

By October, 2013, Mida was shut down, with all receivables collected and forwarded to HSBC. The bank was now paid off. That’s when Love says Deloitte dragged its heels on closing the file. “It was a make-work project,” for them, he claims.

Finally, Deloitte sent Love its bill – which totaled almost $140,000, which included $32,700 in legal fees that Love had never been forewarned about. Moreover, Deloitte had already paid itself by taking the money directly from the receivables as they came in.

In March, 2014, Love received a call from Biehler telling Love he was going to email him a document. It was a release. A tax refund of $267,000 owed to Mida had been obtained by Deloitte. (Love says the tax refund should never have been intercepted by Deloitte.) Biehler told Love to sign the release or he wouldn’t see his tax monies. The release said Love could not sue Deloitte, or question its bill.

“I am not signing anything,” Love says he told Biehler. “You are holding my money up for ransom.”

Love says Biehler also said Deloitte threatened to cash the CRA cheque themselves and use “my money to sue me”.

“I took it to my lawyers and I said this is blackmail – outright blackmail,” relates Love.

Love sued Deloitte, demanding a reassessment of his bill and his tax refund returned. In fact, Deloitte did cash in the CRA cheque after Love sued the firm. (And even when Deloitte finally handed over the tax money, they withheld $50,000). At the 2014-‘15 trial, Biehler admitted that if Love had signed the release it would have prevented him from being able to review Deloitte’s accounting or its bill.

In his ruling, the judge said the work required by Deloitte was “modest at best” and concluded Deloitte had wildly overcharged for its role in the “simple” receivership. He chopped the bill to Deloitte down to $50,000 and the law firm's bill to $28,516. The judge also ordered Deloitte to pay back the $50,000 in tax monies it had withheld and half of Love’s legal expenses. Deloitte declined to answer questions about all matters pertaining to the Love case, and Biehler referred a query to the firm's media relations office.

Despite this win, Love estimates the whole ordeal cost him $190,000 – for a bill not supposed to be more than $50,000. “It wasn’t a win,” he says. “(But) it was a matter of principle.”

Love then went to the Office of the Superintendent of Bankruptcy in Ottawa and complained about Deloitte’s behavior. “So they brought in a special investigator and they looked at the file and they said ‘Wow, wow, this is blackmail’,” he recalls.

But in 2017, Love says the superintendent’s office told him they were closing the file and to stop making inquiries. However, when contacted by National Observer, the Office said the file is still under review and "a decision on further action, if warranted, is expected by the end of this fiscal year."

Love was puzzled when informed of this. "Something smells," he says.

Deloitte's response

National Observer sent a long list of questions to Deloitte Canada on all of the above matters, including supporting material. Deloitte did not respond to the questions specifically, but sent this reply via Tonya Johnson, the firm's senior manager of PR:

"The cases cited represent a range of Deloitte engagements over the last 20+ years, each of which was planned and executed according to the professional standards in place at that time. While our policies and code of professional conduct prohibit us from discussing information about clients or the work that we do for them, we have commented (to the extent possible and when given expressed consent) on public record in some cases, and we stand by those comments."

"With respect to audits, assessing past events through today’s lens requires a nuanced assessment. Over the last two decades, securities regulation requires more of those responsible for public company governance, and the standards followed by auditors (including those related to the responsibility to assess the possibility of fraud) have advanced. Additionally, the establishment of audit regulators has spurred continuous enhancements to audit quality. As governments, regulators and others work to enhance the effectiveness and relevance of today’s financial reporting, Deloitte is an active and supportive participant with other stakeholders in these discussions."