Deloitte hit with £15m fine over Autonomy auditby
The accountancy watchdog has sanctioned Deloitte and two former partners for misconduct in relation to the audit of the ill-fated UK software firm Autonomy.
The Big Four firm was fined £15m, while former partners Richard Knights and Nigel Mercer were fined £500,000 and £250,000 respectively, the Financial Reporting Council (FRC) announced in a statement.
Deloitte was also ordered to pick up legal costs worth a further £5.6m.
The sanctions against Deloitte and its former partners were announced following an independent disciplinary tribunal during October and November 2019 and a hearing in July 2020. The tribunal concluded that Deloitte, Knights and Mercer “fell seriously short of the standards to be expected of a reasonable auditor” during the Autonomy audits for 2009 and 2010.
Deloitte was severely reprimanded and will undertake a full root cause analysis to explain why the firm’s processes and controls did not prevent the misconduct and whether the firm’s current processes would lead to a different outcome.
The two partners also faced disciplinary sanctions: Richard Knights was excluded by the ICAEW for five years, while Nigel Mercer received the lesser penalty of a severe reprimand in addition to his fine.
Failure of professional scepticism
The tribunal concluded that Knights and Mercer “failed to act with competence and due care and professional scepticism” when acting as engagement partner overseeing Deloitte’s audit and review work of Autonomy during 2009 and 2010 respectively.
The misconduct focused on the accounting and disclosure of Autonomy’s sales of hardware and software licences to value added resellers (VARs).
The tribunal ruled that Deloitte should not have issued an unmodified audit opinion in the 2009 financial year and castigated the partners for failing to exercise adequate professional scepticism about the sales and for not obtaining the appropriate audit evidence to substantiate them.
The “wholesale nature of the failure of professional scepticism…” is what makes “this case so serious”, the tribunal commented.
The tribunal also heard how Knights acted “recklessly” in his Autonomy communications with the FRC in January 2010, while Mercer failed to act with professional competence during his stint in March 2011.
The Autonomy fallout continues
The fallout from Hewlett Packard’s doomed acquisition of Autonomy is still unravelling.
Last year the former CFO of the software company was jailed for five years. A US jury found Sushovan Hussain guilty after hearing how he used sophisticated accounting methods to inflate Autonomy’s publicly-reported revenues in the run up to the $11.1bn sale to Hewlett-Packard in 2011. Deloitte came under fire for not spotting any of these irregularities.
A year later HP had to write off $8.8bn off the acquisition due to Autonomy’s “accounting improprieties”.
‘Reflects the gravity of Deloitte’s failings’
Elizabeth Barrett, the FRC’s executive counsel, said the sanctions imposed by the independent tribunal reflect “the gravity and extent” of Deloitte’s failings in 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.”
Barnett added, “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.”