Two Deloitte partners face misconduct allegations over audits of insolvent Bondfield Construction

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Two partners of Deloitte LLP face professional misconduct charges for their audit work at Bondfield Construction Co. Ltd., which sought insolvency protection in 2019 amid allegations of fraud by past management.

Chartered Professional Accountants of Ontario, the regulatory body for the province’s accountants, alleges that Felice “Phil” Iorio and Steve Kostich failed to obtain sufficient evidence to support Bondfield’s audits, failed to adequately query company management and failed to maintain “sufficient and appropriate professional skepticism,” among multiple claims.

The two men are currently contesting the claims by CPA Ontario’s professional conduct committee at a hearing before the organization’s tribunal. Attempts to reach the two men via LinkedIn were unsuccessful. John Finnigan, a lawyer representing Deloitte and the two men, declined to comment.

Deloitte did not respond to requests for comment for this story. In a 2020 Globe and Mail story about its work on the Bondfield audit, a Deloitte spokesperson said, “We are confident that the quality of our work and the diligence and integrity of our people is of the highest professional standard.”

CPA Ontario has not targeted Deloitte, as a firm, for misconduct. The regulatory body did not name the firm in its complaints against the men and described Bondfield and affiliated companies as “the B. Group.” (CPA Ontario confirmed to The Globe that it is referring to Bondfield.)

CPA Ontario spokesperson Kathryn Hanley said in an e-mail that the regulator is not pursuing Deloitte because “an individual faces discipline in these instances based on the Canadian Audit Standards which state that the engagement partner themselves shall be responsible for the direction, supervision, and performance of the audit engagement and compliance with professional standards for the audit.”

Bondfield’s problems came to light in 2018 when Zurich Insurance, which provided surety bonds for more than $1-billion worth of public-sector contracts awarded to Bondfield, began to pay millions of dollars in claims to unpaid subcontractors.

Bondfield fired its president, John Aquino, the son of company founder Ralph Aquino. It then sought court protection from creditors in April, 2019.

The court-appointed monitor for Bondfield launched a forensic probe that alleged John Aquino had participated in a scheme that siphoned $80-million out of Bondfield through the use of false invoices. Ontario courts have since found that $33-million of that amount were “transfers at undervalue” – payments that take place within five years of an insolvency and are made not for a legitimate commercial purpose but rather to put assets out of reach of creditors.

Courts ordered Mr. Aquino and his associates to repay that amount, but he has appealed to the Supreme Court of Canada, which has yet to rule. A lawyer for Mr. Aquino did not respond to requests for comment for this article.

The current CPA Ontario action comes after two lawsuits were filed against Deloitte and Bondfield’s previous auditor, PricewaterhouseCoopers, by Zurich Insurance and Bondfield’s insolvency trustee. The two plaintiffs allege both PwC, which signed off on Bondfield’s financial statements from 2009 to 2012, and Deloitte, which audited the company from 2013 to 2017, were negligent in their work.

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In addition, the plaintiffs allege PwC warned Deloitte of possible fraud at Bondfield before Deloitte agreed to take on the audit work.

In its lawsuit, the trustee says PwC’s audit team became alarmed during its audit of Bondfield’s 2014 financial statements after obtaining evidence that called the construction company’s accounts into question. PwC told Bondfield management on June 16, 2014, that auditors needed more time to perform work to satisfy its concerns. The company allegedly responded the next day by saying it would not allow any more audit work and demanding that PwC sign off on an audit by 10 a.m. the next morning.

Instead, PwC resigned June 19.

The trustee says PwC advised Deloitte in a letter dated the next day that it “suspected fraud” based on evidence its audit team had received and that it had “difficulty in obtaining sufficient and appropriate” evidence from the company because Bondfield management “declined to permit additional work.”

The trustee alleges Deloitte wrote to PwC less than a week later asking for clarification, but PwC either did not respond or failed to answer Deloitte’s questions. “No prudent auditor” would have taken on Bondfield as a client given the situation, the trustee alleges in its suit.

The trustee says Deloitte went on to audit Bondfield’s financial statements for the years 2013 through 2017 but never finished the final year’s audit. Both accounting firms provided an unqualified opinion on all of the statements from 2009 to 2016, which means an auditor believes, based on its work, that the financial statements fairly present the company’s condition.

The court cases, filed in 2019 and 2020, are active and in the discovery phase.

CPA Ontario has not listed any disciplinary cases against any PwC auditor on its website. Ms. Hanley said the regulator is unable to comment on anything not already listed in the public cases.

PwC spokeswoman Anuja Kale-Agarwal said the firm “is not aware of any active investigations involving its partners or employees relating to the Bondfield audit.” She declined to comment on the specific allegations against it by Zurich Insurance and the trustee, saying PwC does not comment on matters before the court.

The CPA Ontario allegations against Mr. Iorio relate to work on the audits of Bondfield’s 2013 and 2014 financial statements.

In the 2013 audit work, performed between June and September of 2014, CPA Ontario said Mr. Iorio, the engagement or lead partner, “failed to take sufficient and appropriate steps to address allegations of suspected fraud and other audit risks made by the predecessor auditor” and “failed to maintain professional skepticism and exercise professional judgment,” among multiple allegations.

CPA Ontario’s allegations regarding the 2014 audit work, performed in 2015, include failure to “consider and audit the risk of material misstatement of the financial statements resulting from fraud.”

The CPA Ontario allegations against Mr. Kostich relate to work on the audits of Bondfield’s 2015 and 2016 financial statements, when he was the engagement or lead partner, and are similar to the allegations made against Mr. Iorio for the 2014 audit.

None of CPA Ontario’s allegations have been proven before the disciplinary tribunal, which meets again on the matter June 24.