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 )
Would reputational damage be something to consider?
I suspect financial observers noticing that Deloitte had audited accounts would take into consideration that it could be safer to check more thoroughly those audited accounts..
Voltaire: “In this country, it is good to kill an admiral from time to time to encourage the others” (Dans ce pays-ci, il est bon de tuer de temps en temps un amiral pour encourager les autres). Commenting on Admiral Byng, who was court-martialled and subsequently executed by firing squad.
A large fine and public humiliation for Deloitte is a step in the right direction. However I remain very concerned that the FRC would have let Admiral Byng live the life or Reilly for 11 years, partying and spending his plunders and ill gotten gains of war, before they decided what to do with him.
Why did Deloitte fully contest this??? The lengthy, fully contested proceedings did allow them to carry on trading without their reputation being sullied.
The Tribunal ordered that Deloitte pay all of the costs of the investigation claimed by the FRC’s Executive Counsel, amounting to £5,635,014.53 (inclusive of VAT), together with the costs of the Tribunal.
Elizabeth Barrett, Executive Counsel, said:
“The significant sanctions imposed by the independent Tribunal and announced today reflect the gravity and extent of the failings by Deloitte and two of its former partners in discharging their public interest duty concerning Autonomy’s Audits. The identified failures to act with integrity, objectivity, scepticism and professional competence go to the heart of audit. After lengthy, fully contested proceedings, the Tribunal concluded that the audit work fell significantly short of the standards expected of an audit firm and its partners. The decision serves as an important reminder of the need for auditors to ensure that they conduct audits in compliance with these key audit and ethical requirements and of the consequences when they fail to do so.”
Just on an historical footnote, the execution of Admiral Byng is considered by many (including Winston Churchill) to have been a grave injustice: https://www.admiralbyng.org/
It is not the job of auditors to believe the figures supplied to them by the employing company, but to prove that they are correct by independent checks of all the source documents and bank statements,etc and only signing them off after verifying that it all adds up.
If they do not do this, they are certainly not worthy of their status, or their remuneration.
Those responsible, and their bosses, should all be personally liable, be struck off, and fined sufficiently large amounts that they suffer severe financial pain to their lifestyles; and they should be forced to requalify before attempting further auditing work.
Like the unfortunate admirals, each practising auditor would surely soon learn from the punishment of others that it is not an easy gravy train.