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Deloitte fined £2m over Mitie audit failures


Deloitte is the latest Big Four firm to receive a financial sanction from the accounting regulator for its audit of British outsourcing group Mitie. 


21st Apr 2022
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The Big Four firm has been fined £2m and severely reprimanded for breaches relating to the audit of Mitie’s impairment testing of goodwill for the financial year ending 31 March 2016 (FY2016). 

Due to Deloitte’s admitting the breaches and early payment, the financial penalty was reduced to £1.45m.

Audit engagement partner John Charlton was also hit with a severe reprimand and a £65,000 penalty (again reduced to £40,000 for early payment and mitigating factors). 

The sanctions related to the audit breaches involving the impairment testing of goodwill in Mitie’s healthcare division. But the Financial Reporting Council (FRC) explained that the breaches were not intentional, reckless or dishonest.

“It is vital that audit work in relation to the carrying amount of goodwill is conducted properly and the disclosures are sufficient to enable investors to understand the position and have confidence in the numbers included in the financial statements,” said Claudia Mortimore, deputy executive counsel at the FRC. 

Recoverability of goodwill 

The regulator pulled up Deloitte over its failure to challenge management and exercise sufficient professional scepticism over the recoverability of the goodwill in the healthcare division. 

The report noted that goodwill was highly material to Mitie’s reported financial position and the company’s FY2016 value attributed £465.5m to the value of goodwill. This was the single largest figure on the balance sheet and accounted for 37.5% of the total reported assets.  

Deloitte identified the recoverability of the goodwill in the healthcare division as a significant risk and the audit report also detailed that the reduction in headroom in Healthcare goodwill was one of the material risks of misstatement that had had the greatest impact on their audit strategy. 

The FRC emphasised in the report that clearly this was an area that required “robust and rigorous audit work”. 

But Deloitte carried out a number of inadequacies in auditing Mitie’s impairment testing of Healthcare goodwill and the disclosures in the FY2016 financial statements. 

These included failures to adequately document the audit work, a failure to obtain sufficient appropriate audit evidence to support the discount rate used by Mitie in the impairment model for Healthcare goodwill and deficiencies in its audit report. 

The regulator said Deloitte should have concluded that “the headroom for impairment of the Healthcare cash generating unit (CGU) was materially overstated in the FY2016 financial statements. If [Deloitte] had complied with the relevant requirements, goodwill in the Healthcare CGU might well have been treated as impaired as at the end of FY2016 and deficiencies in the disclosures concerning Healthcare goodwill would have been detected.” 

The FRC confirmed that since 2017 Deloitte has introduced a number of initiatives to improve the quality of audit work related to goodwill and impairment.  

Deloitte remains committed to audit quality

A spokesperson at Deloitte said, “We regret that a specific part of our FY16 audit of Mitie Group plc, related to the impairment testing of goodwill in Mitie’s healthcare division, fell short of the standards expected. 

“Both the audit partner and the firm have learnt from this process and have taken significant steps to address this issue. We remain committed to audit quality and its continuous improvement.”

Deloitte is one of the largest audit firms in the UK with a revenue of £3.7bn. The firm’s audit fee for the FY2016 audit was £766,000.

Today’s sanctions come a week after the FRC announced an investigation into Deloitte’s audit of Go-Ahead, which covers an unprecedented six financial years. 

However, today’s £2m penalty pales in comparison to the Big Four firm’s £15m fine in September 2020 for its audit of software company Autonomy.

FRC flexes regulatory muscles

Paul Brehony, a partner at Signature Litigation, said that auditors could expect more “ugly (and expensive) headlines and for regulatory scrutiny to be ramped up further”.

This would be driven by new proposals from the FRC, which would see the regulator take control of audit registrations and impose new powers to strike off firms for not delivering high-quality audits. 

The FRC further flexed its muscles last week with the unveiling of a new governance code. The aim of the code was to strengthen oversight of large firms and promote audit quality.

In addition to this, Brehony pointed out that the FRC’s enforcement division has grown 44% and the watchdog’s 2021 Annual Enforcement Review referenced 37 open audit investigations. He concluded that “further fines and disciplinary findings, therefore, appear inevitable”.

While the FRC has hopes of transforming the organisation into a “new robust, independent, and high-performing regulator” ahead of its transition into ARGA, critics have accused the watchdog of “rearranging the audit deckchairs”.

Richard Murphy recently wrote on AccountingWEB that the FRC’s new powers “are just another sticking plaster to cover the FRC’s continuing failure to act in the public interest”.

Replies (8)

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By thomas34
22nd Apr 2022 08:15

Around £1,300 per partner - some punishment.

Thanks (2)
Replying to thomas34:
By Dib
25th Apr 2022 12:36

Indeed - hardly a Mitie fine!

(Well, someone had to say it)

Thanks (0)
By sarahjaneuk
22nd Apr 2022 10:10

These fines are derisory for one of the big accounting firms and are simply then paid for by their PI insurance. It is about time the regulator had the power to fine accounting firms based on a percentage of overall revenue based on the severity of the breach. Then they will take these issues seriously and take action to ensure that audits are carried out robustly.

Thanks (4)
Replying to sarahjaneuk:
By alan.falcondale
22nd Apr 2022 11:21

Agree entirely, fines should be commensurate with the total group turnover akin to competition law where it is 10% (??) plus fines for individuals

Thanks (1)
By Paul Crowley
22nd Apr 2022 10:14

Before audits got all tick box I remember being told that the start point was to pick the three biggest figures on the balance sheet and prove they were correct. (In the days of SSAPs)

Should this advice be be in the first tick box before starting the others?

Thanks (4)
By SPHAccounting
22nd Apr 2022 11:28

Mitie was handed a huge contract to run the COVID testing centres. Deloitte was the consultancy running the overall programme.

Thanks (2)
By Mr J Andrews
22nd Apr 2022 13:24

Good to see that Deloitte .......''remains committed to Audit quality .....'' and that both the firm and the Audit Partner have learnt from this particular process.
If the firm can afford such hefty fines [ albeit an expected hike in their annual insurance policy ] , perhaps they could put a little bit more finance into their training programme and in particular the treatment of goodwill.

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By AndrewV12
26th Apr 2022 10:01

The fine
Due to Deloitte’s admitting the breaches and early payment, the financial penalty was reduced to £1.45m.

The fee
The firm’s audit fee for the FY2016 audit was £766,000.

The fee more or less came to 2 years audit fees, unsure if that is enough.

Thanks (0)