Audit Firm Sues Partner for Insider Trading

Deloitte & Touche has brought an insider-trading lawsuit against a former partner and vice chairman, Thomas Flanagan from Deloitte’s Chicago office. In a case filed in Delaware Chancery Court in late October, the audit firm sued Thomas Flanagan, a 30-year veteran of the firm, accusing him of improperly trading in the securities of at least 12 companies that Flanagan had advised over the past three years.This is a serious issue for an audit firm. Since Flanagan is accused of improperly trading securities, Deloitte’s status as an independent auditor is questionable. Publicly traded companies are required by law to have their financial records review by an independent auditor.After Deloitte told the clients in September that one of its partners may have improperly traded in the clients’ stock, some of the clients questioned Deloitte’s status as their independent auditor. At least three client companies conducted their own investigations after paying outside lawyers to look into the matter. Those clients may sue Deloitte to compensate for those legal fees. Deloitte acknowledged in its Delaware complaint that some of its clients will have to incur “substantial out-of-pocket costs” to investigate whether they can retain the auditor under current Securities and Exchange Commission auditor independence rules and that those clients may sue Deloitte to compensate for those legal fees.