Deloitte stung with record fine for Autonomy audit

An independent tribunal has ordered Deloitte to pay a £15 million and a further £5.6 million in legal fees, after the firm was found to have broken the rules of the UK accounting watchdog. The Financial Reporting Council’s hefty charge came after a massive accounting scandal caused a multi-billion write down of IT company Autonomy, following its sale to Hewlett Packard in 2011.

With a continuing series of high profile oversights in auditing work having led to the demise to a succession of major British companies, the accounting dominance of the Big Four has fallen under intense scrutiny. A growing number of experts and parliamentarians are suggesting that Big Four firms 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 UK’s auditing watchdog has also come under pressure from critics, who claim the Financial Reporting Council (FRC) has not done enough to make an example of accounting firms that have been found in contempt of its standards. While the FRC has resisted calls to formally break up the Big Four, it has stepped up its efforts to police the auditing profession on two fronts: it has announced plans to force top accounting and advisory firms to separate profits relating to their different lines of work; and it has stung the country’s largest professional services firms with record fines for their alleged shortcomings.

In 2018, this saw PwC stung with the largest ever FRC fine for its auditing of now-defunct retailer British Home Stores. Audit Partner Steve Denison, who was responsible for signing off on BHS’s accounts, was fined £325,000 and received a 15-year ban, while the professional services firm was fined £6.5 million. Two years later, however, that record has been shattered by some distance. Deloitte has been hit with a combined bill of over £20 million after a tribunal found in favour of the FRC regarding Deloitte’s audit of Autonomy.

Autonomy

In 2018, the regulator announced it was taking Deloitte to a tribunal over alleged failings surrounding the IT company’s book keeping. 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 allegations included suggesting Deloitte and two of its former Partners, Richard Knights and Nigel 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 argued 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.

During the hearing, the tribunal commented, “It is the wholesale nature of the failure of professional scepticism in relation to the accounting for the hardware sales and the VAR transactions as well as our findings of Misconduct and of breaches of Fundamental Principles that make this case so serious.”

Ultimately this led the tribunal to conclude that Deloitte should be held accountable for its bad auditing following a seven-week hearing during October and November 2019; while sanctions were determined following a hearing in July 2020. As a result, Deloitte has been fined £15 million, and ordered to pay an additional £5.6 million to cover the costs of the FRC’s investigation and the costs of an independent disciplinary tribunal. In addition, Knights was fined £500,000 and suspended from the Institute of Chartered Accountants for England and Wales for five years, while Mercer was fined £250,000 and received a severe reprimand.

Adding to the punishment, the FRC has demanded that Deloitte provides the watchdog a root-cause analysis of the reasons for the auditing misconduct. This must include why the firm’s processes and controls did not prevent the auditing failures, and whether the firm’s current processes would lead to a different outcome.