Bondfield's office in Vaughan, Ont., in April 2020.Cole Burston/The Globe and Mail
Ontario’s accounting industry regulator has ruled that two partners at Deloitte LLP committed professional misconduct by failing to address allegations of fraud at Bondfield Construction Co. Ltd., once one of the biggest public sector builders in the province.
Chartered Professional Accountants of Ontario pursued misconduct allegations against Felice Iorio and Steve Kostich for their work when the firm acted as Bondfield’s auditor on its 2013 to 2016 financial statements and has ordered them to pay a combined total in fines and costs of more than $800,000.
Bondfield sought court protection from creditors in April, 2019, and its former president was convicted of fraud late last year over allegations of favouritism and undisclosed conflicts of interest in the bid process for the redevelopment of St. Michael’s Hospital in Toronto.
CPA Ontario, which regulates accounting firms and their employees, found that Mr. Iorio and Mr. Kostich ignored “numerous red flags” while auditing Bondfield.
“Their violations were varied, revealing a repeated lack of professional judgment and of professional skepticism throughout the course of the audits,” Bernard Schwartz, chair of CPA Ontario’s discipline committee, said in a 66-page written decision issued in February.
One of the red flags Mr. Iorio should have considered more seriously before taking on Bondfield as a client was a warning from PricewaterhouseCoopers, Bondfield’s previous auditor, of possible fraud within the company, the decision says.
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Mr. Iorio and Mr. Kostich did not respond to messages on LinkedIn. John Finnigan and James Hardy, lawyers representing the two men, did not respond to e-mails. Mr. Iorio, the lead partner on the Bondfield audit, is required to pay a $100,000 fine and investigative costs of $345,000. Mr. Kostich has been fined $50,000 and costs of $313,900.
The penalties mark one of the few occasions when Canada’s Big Four accounting firms or their employees have been investigated for significant audit failures.
Last month, the Ontario Securities Commission’s enforcement arm accused another one of the country’s top accounting firms, KPMG LLP, of failing to properly audit the defunct private lender Bridging Finance Inc., leaving the firm facing up to $40-million in fines for allegedly not flagging problems leading up to the private debt manager’s collapse.
In the Deloitte case, CPA Ontario says in its decision that the discipline committee’s panel members agreed with the sanctions with “great reluctance.”
Mr. Iorio and Mr. Kostich initially contested the allegations by CPA Ontario’s professional conduct committee at a hearing before the regulator’s tribunal in 2024 but ended up co-operating and entering into a joint submission on sanctions.
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If the two men had not co-operated, the decision says, the discipline committee would have imposed more significant sanctions.
“The Panel struggled with what appeared to be a lack of remorse and acceptance of responsibility by the Members,” the decision says, adding that Mr. Iorio and Mr. Kostich “did not admit to the misconduct, nor did they provide any indications of insight or remorse.”
Deloitte declined to respond to questions about what changes, if any, it has made following CPA Ontario’s findings. Deloitte said in an unsigned statement that the firm was not part of the disciplinary proceedings. “We take pride in the quality of our work, delivered through diligence, integrity and the professional competence of our people over our 167-year history in Canada.”
Bondfield’s problems came to light in 2018 when Zurich Insurance Company Ltd., which provided surety bonds for more than $1-billion worth of public-sector contracts awarded to the construction company, began to play a more active role, including paying millions of dollars in claims to unpaid subcontractors. Bondfield fired its president, John Aquino, and then sought court protection from creditors in April, 2019.
Ernst & Young Inc., a court-appointed monitor for Bondfield, launched a forensic probe in 2019 that alleged Mr. Aquino had participated in a scheme that siphoned $80-million out of Bondfield through the use of false invoices. The probe alleged that over an eight-year period, Bondfield paid millions to a number of companies for work that was never performed. Some of that money allegedly flowed back to three former Bondfield executives, including $5.2-million to Mr. Aquino.
Ernst & Young sued the three men, as well as four alleged co-conspirators, to recover $33-million in what are known as “transfers at undervalue” – payments that take place within five years of an insolvency and are made not for legitimate commercial purposes, but rather to put assets out of reach of creditors.
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Two lower court decisions in Ontario found Mr. Aquino and his associates liable to pay creditors $33-million. Mr. Aquino appealed to the Supreme Court of Canada, but the country’s top court upheld the earlier rulings in 2024.
CPA Ontario began investigating Bondfield’s auditors shortly after Zurich and Bondfield’s insolvency trustee filed two lawsuits in 2019 against Deloitte and Bondfield’s previous auditor, PricewaterhouseCoopers, alleging the firms were negligent in their work. PwC, Bondfield’s auditor for 20 years, abruptly resigned in 2014 without completing its audit of the company’s 2013 financial statements. Deloitte audited Bondfield from 2013 to 2016.
The CPA notes PwC warned Mr. Iorio in a letter of suspected possible fraud at Bondfield, but Mr. Iorio instead accepted assurances from company executives denying PwC had raised similar concerns with them.
“Despite this significant and apparent contradiction relating to an allegation of fraud made by PwC, Iorio appeared to accept and prefer the explanations provided by John Aquino and [his colleague] over those of PwC,” the decision says.
Mr. Iorio did attempt to obtain more details from PwC regarding its concerns, but PwC declined to provide further information after Bondfield refused to give it the go-ahead, the decision says.
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Mr. Iorio then asked Deloitte’s forensic group to address PwC’s concerns, but there was no evidence in the audit file that the group had completed or reported the results of their work by the time Mr. Iorio accepted Bondfield as an audit client.
The discipline committee found that Mr. Iorio “did not exercise the requisite due care when accepting the Bondfield engagement,” the decision says. The failures that arose in the 2013 and 2014 audits, which were led by Mr. Iorio, were repeated during the 2015 and 2016 audits led by Mr. Kostich, the decision says.
“Both Iorio and Kostich failed to exercise the necessary professional skepticism repeatedly throughout the audit when confronted with issues relating to John Aquino’s integrity,” it says.
Mr. Aquino was convicted last year of fraud along with Vas Georgiou, a former chief administrative officer at St. Michael’s Hospital, in connection with the multimillion dollar redevelopment of the health care facility. The two men are appealing.
Deloitte has previously faced sanctions in other cases.
In 2023, Deloitte agreed to pay $1.59-million to settle charges brought by CPA Ontario that its employees falsified data and time stamps on audit work papers over a 17-month period. In addition, five current and former partners at Deloitte also settled with the regulator and were fined $20,000 each.
And back in 2007, the Ontario accounting regulator fined two retired Deloitte partners and a current partner $100,000 each – its biggest financial penalties at the time – for errors made during the 1997 audit of failed theatre company Livent Inc.
Special to The Globe and Mail