Record fine for Deloitte over Aero audits

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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.”

‘Reckless’ transactions

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.

Tom Herbert
Business Editor
AccountingWEB
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11th Nov 2016 11:04

apply straight line discount to stock...??

Anyone fill in the missing bit here so I can see what went wrong?

if you buy $34m stock - there will be a list and if you sell some for $23m. There may be a small profit or loss, but lets say its thE same for now. So you have £11m stock left at cost. Are they saying you now have to reduce this £11m on some straight line basis? What happens to cost v NRV

Anyone add a bit more technicality to this please.

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11th Nov 2016 11:56

Without having any detail of the case I read it the other way. Ie they bought something for 34m then sold it immediately for 23m. Hence an 11m loss should have been recorded but they kept the 11m in "stock".

Therefore NRV was lower than cost and instead stayed on the balance sheet for the 3 years (presumably the timeframe over which they did impaired it?).

Perhaps someone closer to the case can confirm?

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11th Nov 2016 12:13

I haven't seen the report but I assume what they are saying is that profit was wrongly taken on the $23m sale and therefore the remaining stock from the transaction was valued at more than $11m. The remaining stock should presumably have been values at no more than $11m and the values attributed to the individual lines in the original purchase reduced accordingly.

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By 356B
11th Nov 2016 12:51

And it's only taken ten years to reach this position.
Can we start a fund to buy the FRC some dentures?

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By MC1
11th Nov 2016 13:08

"Nice one, only £4m and a rap on the knuckles, look at all that advertising we've got from it. Guinness Book of Records and all that exposure. Good work guys and brilliant result after 10 years of hard work. Right now let's see how we can beat that one."

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11th Nov 2016 14:43

Does anyone wonder if this is typical of a Big Four audit ?
Maximum fees for minimum work (carried out by trainees) ?

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By paddy55
to John Wheeley
12th Nov 2016 03:56

And don't ask too many questions or you know what!

Every schoolboy knows that each item of stock must be valued at lower of cost or replacement price.

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12th Nov 2016 10:07

The bit that confused me was

"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. "

2006 transaction surely must go in 2006 accounts? Unless pulling a June transaction back into April accounts?

One presumes that these transactions involved large amounts of stock traded at great discounts to the sum of the valuations of individual parts. There is of course NO "correct" way of attributing individual value until the final unsold parts - probably the majority - are scrapped. But there are some ways that clearly overstate profit of a particular period and others that clearly understate it. Deliotte's job is clearly to keep them in the Goldilocks zone.

He should also have taken due care to apply straight line discount to stock acquired under such a bulk purchase contract.

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14th Nov 2016 12:21

All sounds okay, however what did the shareholders receive, not a lot I guess, yet again another Global based complicated business set up....... I know its just tax planning and the Global economy.

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.

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