FRC fines Deloitte £4 million over Serco tagging scandal

16 July 2019 3 min. read
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Deloitte has been hit with a fine of more than £4 million by the Financial Reporting Council, after it failed to act with professional competence during 2011 and 2012 audits of Serco Geografix in 2011 and 2012. The accounting watchdog severely reprimanded the Big Four firm for its audit, which occurred during the outsourcing firm’s electronic tagging scandal.

At the start of July 2019, outsourcing company Serco was stung with a hefty £23 million fee as part of a settlement with the Serious Fraud Office (SFO) over electronic tagging contracts. Serco was fined £19.2 million and ordered to pay £3.7 million in costs after its UK subsidiary Serco Geografix took responsibility for three offences of fraud and two of false accounting between 2010 and 2013, relating to understating profits from its electronic monitoring contracts with the Ministry of Justice (MoJ). Speaking to the press, the firm stated that it was “mortified.”

Rupert Soames, Serco’s Group Chief Executive, stated, “Those of us who now run the business are mortified, embarrassed and angry that, in a period between six and nine years ago, Serco understated the level of profitability of its electronic monitoring contract in its reports to the Ministry of Justice. Serco apologised unreservedly at the time, and we do so again.”

FRC fines Deloitte £4 million over Serco tagging scandal

Now, Big Four professional services firm Deloitte has in turn been punished for its role in the scandal. The Financial Reporting Council’s (FRC) issued a fine of £4.2 million for its audit of Serco’s Geografix division in 2011 and 2012. The accounting firm will pay £300,000 towards the costs of the three-year investigation, while the accounting watchdog also severely reprimanded Deloitte Partner, Helen George, fining her £97,500.

According to The Guardian, Deloitte has arranged for all its audit staff to undergo training which is aimed at preventing similar audit failures in the future. Meanwhile, Serco’s settlement with the SFO means the company will not face criminal charges following a lengthy investigation. Serco had already agreed a £70 million settlement with the MoJ itself in 2013, after the firm was hit with allegations of charging for tagging people who were dead, jailed, or were no longer in the UK, alongside fellow outsourcer G4S.

The FRC said of the case, “Deloitte and George failed to act in accordance with the fundamental principle of professional competence and due care.”

Both fines would have been significantly larger, but reduced as part of a settlement after the firm and Partner admitted to misconduct in the case. Despite that, the fines for the accounting firm George still pale in comparison to the punishment of Serco by the SFO, and will arguably do little to persuade critics of the FRC – which is set to be replaced with a new statutory regulator – that the watchdog has the necessary clout to bring the accounting industry to heel.

This is the latest in a succession of similar fines to be slapped on the world’s four largest auditing and advisory firms – the Big Four of Deloitte, PwC, KPMG and EY – and the fact so many cases have continued to occur suggests that the FRC’s efforts are failing to bear fruit. PwC was handed a £4 million fine for its “serious lack of competence” following the uncovering of a £20-million black hole in client Redcentric’s books. Meanwhile, KPMG was also fined around £4 million for its work for the Co-operative Bank, where it supervised the company’s accounts before a £1.5 billion capital shortfall was found, resulting in the near collapse of Co-op.