In the shadows: Did Deloitte facilitate a Cuckoo Scheme?

In an era where financial impropriety often involves more sophistication than force, the words of Warren Buffet and Charlie Munger in their 1988 Berkshire letter still resonate as a timeless truth: 

“It has been far safer to steal large sums with a pen than small sums with a gun.” 

In the realm of modern corporate finance, the principle of gatekeeper liability is not just important; it’s indispensable.  

The concept hinges on a simple premise: entities like law firms, investment banks, and accounting firms hold the key to monitoring and curtailing corporate misconduct, with their minimal responsibility being the reporting of any client behavior they suspect may involve misconduct.

The gatekeeper doctrine argues that the threat of reputational damage, by itself, is not a strong enough deterrent. Gatekeepers might deliberately erode their reputational capital, just as they would any other business asset, as a calculated risk to maximize expected profits (with a profound disregard for societal harm, as long as their marginal benefits exceed marginal costs). 

Recent Big 4 scandals highlight this narrative. Auditors have been found engaging in a range of unethical behaviours, including deceptive accounting practices, obscuring inflated financial figures, involvement in dubious government affairs, overlooking rampant cheating on accounting exams, rubber-stamping dubious client estimates,… 

Our elite auditing quartet has certainly been busy. 

In the case involving Trafigura’s acquisition of Nyrstar’s operational activities, which led minority shareholders (represented by RSQ Investors) to file a substantiated €2 billion claim in May 19, we strongly suspect a similar pattern was at play. 

In the December 11, 2023 article by Bert Broens for De Tijd [Klacht tegen revisor Deloitte in dossier rond Nyrstar], Deloitte is the subject of allegations filed with the CTR (college van toezicht op bedrijfsrevisoren). These allegations arise from an analysis of the FSMA report and related documents, which suggest that there are very strong indications that Deloitte -among other things- [may] have been aware of misleading information provided to the market. Nevertheless, the accounts were signed without any reservations, or with only limited or inadequate reservations (note: Deloitte’s fees for Nyrstar in 2019 were €5 million).

This kind of conduct undermines the confidence of investors and minority shareholders in the legal system and the effective operation of our capital markets. Haven't the harsh lessons from the scandals of Enron, Wirecard, and others taught us anything? Isn’t it about time we hold auditors and other professional service firms more accountable for their facilitating role in corporate wrongdoing?