Chimera Seems to Have Enjoyed Firing Deloitte a Little More the Second Time Around

If you've read anything recent about Chimera Investment Corp., you're no doubt glad that you don't have any part in it. Tony Catanatch's post from last week has more than enough to most auditors want to grit their teeth into dust:

Here is a company that has neither filed a quarterly report since November 18, 2011 (for the quarter ended September 30, 2011), nor an annual report since February 28, 2011 (for the year ended December 31, 2010).  Yet, securities regulators permit Chimera to operate, and allow its stock to be listed and traded.  John Maxwell at the Motley Fool has described this situation as “inexcusable,” and that’s an understatement, for all the questions this situation raises.

A fine mess. A fine mess indeed.

The audit firm in this case was Deloitte and last year, Chimera reported in an 8-K that they'd told the Green Dot that their services were no longer needed. Except for finishing the 2011 audit, that is. An official unoffical dismissal of the firm, you might say, "effective as of the date of Deloitte’s completion of the audit services for the fiscal year ended December 31, 2011 and the filing of the annual report on Form 10-K." 

Well, it took a while! A whole year, in fact. Here's the 8-K from Wednesday announcing the news that Deloitte had wrapped things up:

Deloitte has completed the audit services for the fiscal year ended December 31, 2011, and on March 8, 2013 the Company filed its annual report on Form 10-K for the fiscal year ended December 31, 2011 (the “2011 10-K”).  Therefore, the effective date of the Company’s dismissal of Deloitte as its independent registered public accounting firm is March 8, 2013.  The Company is filing this Current Report on Form 8-K to update the March 15, 2012 8-K for the period between March 11, 2012 and March 8, 2013; therefore, this Current Report on Form 8-K should be read together with the March 15, 2012 8-K. 

So, the official official firing has been executed annnnnd we're done here, right? Nope! 

On February 24, 2013, Deloitte informed the Company and the Audit Committee that during the audit of the 2011 consolidated financial statements and related audit procedures for the restatement of the 2010 and 2009 consolidated financial statements, Deloitte previously had a disagreement with management over the use of cash flows used to estimate other than temporary impairment and interest income accretion differing from those used to estimate fair value. Deloitte also stated that this disagreement had been satisfactorily resolved.
 
Deloitte did not communicate to the Company or the Audit Committee that it previously had a disagreement (as that term is defined in Item 304(a)(1)(iv) of Regulation S-K and the related instructions) with management at any time prior to February 24, 2013.  On March 8, 2013, Deloitte advised the Company that this disagreement occurred in mid-May 2012 and was resolved by mid June 2012.

Huh. So a couple months after Deloitte was unofficially fired by Chimera, a disagreement with management over a valutation method came up. It lasted about a month, at which time they sorted it out. For whatever reason, Deloitte didn't think to mention it until a few weeks ago. Crain's finds this strange:

Considering that mortgage investment firm Chimera Investment Corp. last week said it overstated about $650 million worth of profits, it comes as little surprise to learn it had a disagreement with its auditing firm over accounting.

The strange thing is that the auditor, Deloitte & Touche, didn't inform senior Chimera executives or the board about the dispute. That, at least, is Chimera's account of events given in a regulatory filing late Wednesday. 

[…]

Accounting rules dictate that auditors promptly notify audit committee members of disagreements, though the disputes don't have to be disclosed publicly until the auditor is replaced, said Baruch College accounting professor Douglas Carmichael.

What's also strange is that auditors don't follow accounting rules, but never mind the semantics. 

Maybe it's strange because Chimera's disclosure sucks. The short version of it is: Deloitte disagreed with management about something. It was a temporary disagreement. The end.

Which makes me wonder why Deloitte would've brought it up in the first place — unless it was material — but Chimera doesn't say anything about that and doesn't seem to imply that it was a BFD. And that's kinda the important part. Here's a snip from AU 380 which was in effect at the time:

The auditor should discuss with the audit committee any disagreements with management, whether or not satisfactorily resolved, about matters that individually or in the aggregate could be significant to the entity's financial statements or the auditor's report. For purposes of this section, disagreements do not include differences of opinion based on incomplete facts or preliminary information that are later resolved. 

If you'll allow me to speculate — considering Chimera's apparent incompetence in financial reporting matters, it wouldn't be too much of a stretch if the audit committee heard the Deloitte partner say something like, "Yeah, we disagreed about this thing last May, something something something and a month later the thing was resolved," when what (s)he probably said was, "Yeah we disagreed about this thing last May, but we didn't have all the facts. It took a little while and a month later the thing was resolved."  

Then the audit committee grumbled with management about it; they all looked at each other and said, "We'll stick in the next 8-K when we officially fired those bastards." And laughed heartily about it.

Or something.

Anyway, for Deloitte's part, their letter to finalize this matter hasn't been filed yet, and my guess is they'll just let it slide. When a former client's name suggests an "incongruous fancy, or creature of the imagination" it's best to be glad the whole thing is over with.

Chimera: So Many Questions, Too Few Answers [GOA]
8-K/A [SEC]
Chimera claims Deloitte was silent [Crain's]

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