The Financial Reporting Council (FRC) imposed a record fine on Deloitte for its audit of aeroplane parts wholesaler Aero, which fell “significantly short of the standards expected of them”.
Concluding a long-running inquiry into Deloitte’s failures relating to audits of the collapsed AIM-listed company for the financial years ending June 2006, 2007 and 2008, the tribunal issued Deloitte with a record fine of £4m, ordered the Big Four firm to pay costs in the region of £2.3m for the proceedings and issued it with a severe reprimand.
The tribunal also fined and reprimanded Deloitte audit partner John Clennett £150,000, stating that the conduct of both Deloitte and Clennett “fell significantly short” of the standards reasonably expected from a member firm and the ICAEW respectively.
Aero supplied spare parts including air conditioning systems to airlines such as easyJet and Ryanair. The company went into administration in November 2009 after its shares were suspended following concerns raised over its stock valuation. The issues were discovered when accountants were preparing Aero to move from AIM to the main market of the stock exchange. Prior to the discovery the company was considered one of the rising stars of the junior stock market.
‘Misleading information’ provided to the market
Commenting on the sanctions Gareth Rees QC, executive counsel to the FRC, said: “This fine of £4m is the highest recorded by the FRC for misconduct on a firm and was imposed on Deloitte by the tribunal following a five-week hearing.
“It is a clear indication of the importance of the highest standards being maintained in all audits and the seriousness of the failure to perform an adequate audit of these financial statements which led to misleading information about the profits and turnover of the company being made to the market.”
A Deloitte spokesperson told AccountingWEB: “We accept the findings of the tribunal and regret that in this instance our audit did not meet professional standards. Our audit quality processes have evolved significantly since these audits were performed between 2006 and 2008, and we are relentless in our focus to ensure all our audits are of the highest quality.”
In July 2015 Aero’s former finance director Hugh Bevan was barred from the profession for three years and required to pay £170,000 in costs after admitting that his conduct fell significantly short in several key areas. This included breaching the ICAEW's principles of integrity and performance for recklessly including revenue and profit from the so called “Garuda transaction” in the financial statements for the financial year ended 30 June 2006.
The Garuda transaction was an agreement reached in June 2006 where Aero purchased an aircraft parts inventory from the Indonesia’s flagship carrier PT Garuda for US$34m. An agreement was reached on the same day by which Aero immediately re-sold some of the inventory it had acquired from Garuda to GMF AeroAsia (a 99% owned subsidiary of Garuda) for US$23m.
Bevan failed to report to Aero’s board that if the Garuda transaction was included in the 2006 statements, it should have been reported as an exceptional item. He should also have taken due care to apply straight line discount to stock acquired under such a bulk purchase contract.
The impact of this was that the accounts did not show a true and fair view of the true state of affairs of Aero Inventory as of 30 June 2006, 30 June 2007 and 30 June 2008, the ICAEW disciplinary committee concluded.