The Financial Report Council (FRC) has fined accounting firm Deloitte £20.6 million (including costs) for its defective auditing of Autonomy. Deloitte is the largest of the big four audit firms and this is what the head of the firm said when talking about their 2019 results: “Our FY 2019 results are a validation of Deloitte’s strategy to deliver high-quality, globally consistent service to our clients while continuing to serve the public interest and working to restore trust in capital markets”.
Revenue of the firm in 2019 was $46.2 billion. The average payout to UK partners was £882,000 and there were 699 partners (i.e. a total paid of £616 million). That size of fine therefore will not worry them much. The fine should surely have been much greater!
The fine is the biggest yet issued by the FRC which at least means it’s a step in the right direction, but still not far enough.
This is some of what the FRC said about the case:
“The Tribunal found that each of Deloitte, Mr Knights and Mr Mercer [the two responsible audit partners] were culpable of Misconduct for failings in the audit work relating to the accounting and disclosure of Autonomy’s sales of hardware during FY 09 and FY 10. They failed to exercise adequate professional scepticism and to obtain sufficient appropriate audit evidence. Deloitte should not have issued unqualified audit opinions in these years based on the audit evidence obtained. Deloitte, Mr Knights and Mr Mercer fell seriously short of the standards to be expected of a reasonable auditor.
Similarly, in relation to certain of Autonomy’s sales to VARs, the Tribunal found that Deloitte, Mr Knights and Mr Mercer were culpable of Misconduct for failing to obtain sufficient appropriate audit evidence and for a lack of professional scepticism in relation to the nature of these sales. Deloitte and Mr Knights should not have issued an unmodified audit opinion in FY 09 without obtaining further audit evidence.
The Tribunal commented that ‘…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’.
The Tribunal also made findings of Misconduct in relation to the consideration by Mr Knights and Mr Mercer of Autonomy’s communications with its regulator, the FRC’s Financial Reporting Review Panel (FRRP), in January 2010 and March 2011 respectively. Mr Knights acted recklessly and thus here with a lack of integrity. Mr Mercer failed to act with professional competence and due care”.
Autonomy was acquired by HP who relied partly on the audited accounts no doubt but subsequently had to write off $8.8 billion related to the acquisition. Both criminal and civil law suits over the accounts of Autonomy are still live.
Altogether a disgraceful example of how the auditing profession is being brought into disrepute of late.
Roger Lawson (Twitter: https://twitter.com/RogerWLawson )
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Roger, as usual you are spot on with your analysis. Revenue of the firm in 2019 was $46.2 billion. The average payout to UK partners was £882,000 and there were 699 partners (i.e. a total paid of £616 million). That £20.6million fine therefore will not worry them much.