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Navistar's Lawsuit Against Deloitte

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Navistar International Corporation(NIC) is an international manufacturer of trucks, school buses, and automotive engines. Cyrus McCormick, the founder of NIC, decided to pick Deloitte as the company’s independent accounting firm to audit their financial statements. After 98 years, in 2006, Navistar fired Deloitte as their independent auditors due to an accounting fraud. Later Navistar filed a lawsuit against Deloitte alleging professional malpractice, poor accounting practice and providing inadequate auditing services. In 2005 Deloitte engagement partner was virtually done with the audit for fiscal year ending October 31, 2005, but he took a sudden medical leave and a new engagement partner, Arthur Anderson, had to take over. Anderson was alarmed to see the financial statements and the current position of Navistar and decided to conduct an audit over again. By doing so Navistar missed the filing deadline for Form 10-K. Furthermore, Navistar spent 200 million dollars to correct the faults and redo the audits. They hired accountants from …show more content…

Navistar used warranty, rebate and improperly deferring start-up cost to hide the fraud. There are two types of warranties assurance type and service type. Assurance type warranties are issued with the product and service type warranties are bought separately. In Navistar’s case, the employees treated the warranties as service type warranty and deducted it from estimated warranty expense. There was no in flow of cash and Navistar had to pay for the repairs out of pocket. Warranties are contingent liabilities; therefore, Navistar should have estimated the expenses and use accrual-basis accounting approach to record the warranty expense. The auditors should have looked at their warranty expense and unearned warranty revenue accounts to conclude if the numbers on the financial statements matched the numbers on the

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