And Where Were the Auditors?

There's little doubt that Boeing Co. (BA ) could have done a better job of alerting investors to its 1997 production problems. But how much responsibility should be heaped on the company's auditor, Deloitte & Touche?

Tough question. Because most of the auditor's work papers in the case haven't been made public, outsiders can't fully evaluate how Deloitte counseled the aerospace giant. But plaintiffs' attorney Steve Berman, who has seen the sealed documents in the Boeing suit, says the auditor failed. "Their duty [was] to provide a fair and accurate portrayal of Boeing's financial condition. They didn't do that," says Berman. Noting that the auditor did outside consulting work for Boeing, he adds: "This is another example of a big accounting firm beholden to a key client."

Those are strong words. The fact is, though, that Berman didn't sue Deloitte; he says the 1995 Private Securities Litigation Reform Act makes it too hard to sue auditors. But his decision not to litigate raises the question of whether the case against the firm was as strong as he claims. Deloitte's explanation: It did nothing wrong. "Deloitte & Touche continues to believe that its quarterly review reports and annual audit report in 1997 were appropriate," the firm wrote to BusinessWeek. Deloitte declined to discuss any of the specific documents unearthed in the case.

The truth is probably somewhere in between these two extreme views. The key issue is whether Deloitte should have pressured Boeing to take a charge for its production problems in the first two quarters of 1997--before the McDonnell Douglas merger went through. There's little doubt that Deloitte was well aware of these problems. Plaintiffs' attorneys cited several work papers indicating the firm's employees questioned the timing of Boeing's write-offs, the recognition of cost-savings benefits, and the use of reserve funds.

But the auditor's power to force Boeing to disclose these problems was limited. Accounting firms sign off only on annual audits. Since Deloitte was not required to lend its signatures to Boeing's first two quarterly financial disclosures during 1997, it did not have the leverage to force the company to make any adjustments. But it may still have had some responsibility to shareholders. Statement on Accounting Standards 71 requires auditors working on a 10Q quarterly disclosure to force their clients to tell investors about new material information--or to resign.

Determining whether Deloitte ran afoul of SAS 71 would probably have taken a long trial. But University of Michigan accounting professor Eugene A. Imhoff Jr. thinks that, in any event, "Deloitte should have done more sooner." That's a refrain more auditors are starting to hear.

By Stanley Holmes in Seattle and David Henry in New York

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