FRC takes Deloitte to tribunal for $5 billion Autonomy scandal

01 June 2018 4 min. read
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Big Four firm Deloitte has become the latest professional services giant to face a probe from the Financial Reporting Council. The tribunal will examine alleged failings in collapsed IT firm Autonomy’s book-keeping, which Deloitte was responsible for as auditor.

The Financial Reporting Council (FRC) which oversees the British auditing market, recently made headlines when it said a break-up of the Big Four may be necessary. The largest members of the accounting and advisory world hold a 98% share of FTSE 350 auditing contracts, despite a series of EU and UK reforms aimed at tackling a lack of competition since the 2008 financial crisis.

The latest chapter in the on-going saga now sees the regulator taking Big Four firm Deloitte to a tribunal over alleged failings surrounding IT company Autonomy’s accounting. Autonomy, a UK software company, was bought by Hewlett Packard in 2011 for $10.3 billion (£6.7 billion) – however one year later, the buyers announced an $8.8 billion write down, alleging that over $5 billion of that was due to accounting irregularities.

The FRC has since announced that after an initial investigation into Autonomy’s financial reporting between 2009 and 2011, the watchdog will deliver formal complaints under the accountancy scheme to Deloitte and two of its former Partners Richard Knights and Nigel Mercer, as well as further actions against former Autonomy CFO Sushovan Hussain and former Vice President of Finance Stephen Chamberlain.

The FRC alleges that Deloitte, Knights and Mercer all failed to sufficiently contest Autonomy’s accounting, as well as the disclosure of its purchases and sales of computer hardware. The regulator also believes Deloitte did not adequately challenge its accounting for transactions with value added resellers, and left false or misleading communications made by Autonomy to the Financial Reporting Review Panel (FRRP) of the FRC uncorrected.

FRC takes Deloitte to tribunal for $5 billion Autonomy scandal

Hussain and Chamberlain are also alleged to have breached the fundamental principle of integrity, as a result of acting dishonestly and or recklessly. Hussain has already been convicted of fraud by a US court in May 2018, and is awaiting sentencing while on bail in the States.

When presented with the charges leveled at Deloitte itself, a spokesperson for the firm’s UK wing said, “Deloitte acknowledges today’s announcement from the FRC and has fully cooperated with the investigation to date. We are disappointed that these complaints have been brought and we will defend ourselves against them at tribunal.”

Growing precedent

As a series of high profile oversights in auditing work have allegedly led to the demise to a succession of major British companies, the dominance of the Big Four has fallen under intense scrutiny. A growing number of experts and parliamentarians are suggesting that KPMG, Deloitte, PwC and EY should be made to divest their UK consulting wings, which they believe lead to conflicts of interest behind the accounting errors.

The FRC has brought numerous cases against the gang of four in recent years. Deloitte itself already came under scrutiny in 2017 for its auditing of Mitie Group, an outsourcing company which issued a string of profit warnings last year. In the same year, PwC was handed the largest fine ever administered by the watchdog, following a charge of ‘misconduct’ relating to its auditing of Connaught. PwC was ordered to pay £5 million for its role in the collapse of outsourcer Connaught in 2009.

Comparisons to these cases were inevitably drawn when the FRC announced in early 2018 that it was to investigate KPMG on similar grounds, following the liquidation of Carillion in January. While KPMG’s role as internal auditor at the former construction and outsourcing firm remains under examination, the FRC was also reported to have begun mulling a further investigation into the firm, following a litany of accounting bungles led to the collapse of Conviviality in March 2018. KPMG had acted as the alcohol retailer’s auditor since 2015, and according to an FRC spokesperson, "If the relevant threshold tests are met in relation to accountants at the company and/or its auditors a formal investigation may be opened.”

Fellow Big Four member EY was also the target of a misconduct probe from the FRC late last year. In that case, the UK’s accounting watchdog fined EY £1.8 million relating to its audit of the British unit of a global tech distributor. In 2013, Tech Data, a Nasdaq-listed company with a market value of $3.6 billion, uncovered what it called “improper” accounting and an “inadequate control environment” in its UK subsidiary. It then restated significant elements of its group accounts for years as far back as 2009.