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Nortel decision takes bite out of Deloitte

Auditor was paid $81-million by tech firm in 2005

Carrie Tait and Duncan Mavin, Financial Post Published: Wednesday, December 06, 2006


The abrupt end of a 92-year relationship between Nortel Networks Corp. and its auditors will take a significant bite of international accounting giant Deloitte & Touche LLP's business in Canada.
Fees from Nortel, which ditched Deloitte as its auditor this week, made up more than a third of the total audit and related fees Deloitte has been paid by its biggest Canadian clients in recent years.
"Deloitte bears some responsibility for [the Nortel restatements,]" said Bill Mackenzie, president of governance watchdog Institutional Shareholder Services. "If there were errors in the accounts that were not picked up, I'd say there should be a fair bit of accountability there."
Deloitte was paid about $81-million by Nortel for audit and related work in 2005, the highest amount received by any Canadian auditor last year, according to a report by Workflow International Inc. The next-highest fees paid to an auditor were less than $30-million.
In total, Deloitte received about $236-million for audit and related work from the top 100 TSX companies.
That means the Nortel fees represented 34% of the total fees Deloitte earned from the TSX's biggest companies in 2005 -- the 2004 figure was about 37% -- though the audit firm also earns consulting fees and fees from businesses outside the TSX top 100.
Further, when a Big Four audit firm like Deloitte loses a substantial client, the financial blow isn't the only problem the auditor will have to address, said Lance Osborne, founder of Lannick Associates, a executive search firm specializing in chartered accountants.
"It leaves a hole in their schedule that they're going to be scrambling to fill," he said, speaking in general terms, rather than specifically to Deloitte.
"They are going to have all kinds of resources that they would normally dedicate to [the company] that they're going to have to redeploy."
Deloitte, whose predecessor firms have been auditing Nortel's predecessor companies since 1914, played down the importance of losing Nortel's business.
"This is kind of feels like a non-event in our world," said Jacqui D'Eon, a spokeswoman for Deloitte.
"This kind of things happens all the time," she said. Deloitte, she added, will develop a "new professional relationship" with the telecom company.
Under Deloitte's watch, Nortel restated and repeatedly delayed financial results, with problems reaching as far back as 1999. Deloitte will finish Nortel's 2006 audit and KPMG LLP will pick up doing the books in 2007.
While Deloitte may have lost its most significant client to rival KPMG, the change could be a good thing for corporate governance at Nortel, said ISS's Mr. Mackenzie.
"From the point of view of getting fresh eyes and avoiding an Arthur Andersen-Enron cozy relationship, switching audit firms from time to time does seem to make sense," Mr. Mackenzie said. Enron's auditor, Arthur Andersen, was criticized for compromising its independence by becoming too reliant on fees from the energy giant.
ctait@nationalpost.com
DIVORCE, AFTER 92 YRS
NORTEL & DELOITTE'S FIRST DATE: In 1914, Northern Electric Manufacturing Company merges with The Imperial Wire and Cable Company to form The Northern Electric Co. Ltd. A predecessor of Deloitte & Touche is the company's internal auditor.
IRRECONCILABLE DIFFERENCES: On Dec. 4, Nortel announces it will replace Deloitte with rival KPMG LLP.
WHAT'S THE IMPACT?: Nortel's business accounted for 34% of Deloitte's earnings from the TSX's biggest companies in 2005.
... OR: Whatever 'This kind of thing happens all the time,' says Jacqui D'Eon, spokes-woman for Deloitte

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