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Deloitte fined £900k over SIG audit failures

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Deloitte ended 2022 with a £900,000 fine from the accountancy watchdog over audit failures of SIG plc. 

3rd Jan 2023
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Announced days before Christmas, Deloitte’s fine from the Financial Reporting Council (FRC) related to the statutory audit of the financial statements of the British-based construction product manufacturer SIG for the financial years ended 31 December 2015 and 31 December 2016.

The FRC handed the Big Four firm a £1.25m fine but this sanction was discounted due to early admissions to £906,250. Simon Manning, the statutory auditor for the FY2015 and FY2016 audits and the group engagement partner, was fined £50,000 but this was discounted to £36,250. 

Deloitte and Manning were pulled up by the FRC over audit breaches of supplier rebates and cash. 

Specifically, the watchdog found that the Big Four firm did not obtain and document sufficient audit evidence as set out in SIG’s rebate workbooks and didn’t exercise sufficient professional scepticism. 

Overstatement of rebate and cash

The construction company had rebate agreements in place with several key suppliers as a way to encourage the SIG to purchase the suppliers’ building materials.  

The FRC highlighted in the final settlement decision notice that SIG’s financial statements for FY2017 had restatements for FY2015 and FY2016 due to historical overstatements of rebate balances, cash and trade payables. 

As for the supplier rebates, the decision notice explained that the audit work relied on the rebate workbooks used by the SIG employees to record the terms of agreements. However, the audit team tested an agreed sample but the FRC called the testing “deficient”, with rebate workbooks deemed satisfactory when they were not. 

In one example, out of the sample of 25 supplier rebate terms tested in FY2015 that were marked “satisfactory”, only 12 were recorded as having a signed agreement. 

The FRC concluded that the audit team should have challenged SIG to provide further evidence to support the rebate percentage terms used in the workbooks or sought evidence from the suppliers. 

As for the cash breaches, the FRC concluded Deloitte failed to enquire into the indicators that certain cheque payments were made pre- rather than post-year-end, which demonstrated a failure to perform the audit work with professional scepticism.  

Deloitte takes steps to mitigate risk of repeat

Deloitte was paid £2.9m for the audit services provided to SIG in FY2015 and FY2016, but the FRC noted that the firm did not stand to gain from the breaches, and the breaches were not reckless or intentional. 

The Big Four firm has since refreshed and updated its supplier rebate work programme to reinforce the requirement to obtain sufficient appropriate evidence regarding supplier rebate terms, and providing an update briefing to audit teams on the risks relating to supplier rebates and common pitfalls, explained the document. 

Jamie Symington, FRC’s deputy executive counsel, said: “These breaches concerned two discrete areas of the audit of a particular subsidiary of SIG plc. They involved contraventions of requirements, which are fundamental to the role of the independent auditor, and were associated with material misstatements in SIG plc’s accounts which had to be corrected. 

“The breaches in respect of supplier rebates were made all the more serious by the fact that the FRC had highlighted these complex supplier arrangements as requiring particular attention from auditors.”

Deloitte has been subject of five other FRC investigations since 2015, with four out of those five cases resulting in a severe reprimand and the firm has been hit with financial penalties ranging from £0.5m to £15m. 

Replies (3)

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By Hugo Fair
03rd Jan 2023 17:13

Another couple of phrases seem to have entered the lexicon of these reports over the last year - now that the FRC has joined in with the game of 'pass the parcel' played by the Auditors (with their go-to menu of 'lessons learned' and 'refreshing & updating procedures') ...

* "the firm did not stand to gain from the breaches, (which) were not reckless or intentional" - so merely incompetent rather than intentionally complicit in fraud;
* "sanction was discounted due to early admissions" - so 'play the game' and we'll reduce the cost.

Of course, the cynical might feel that these are evidence of a 'nothing to see here' attitude and open evidence of no desire to change anything. You might think that - but I couldn't possibly comment!

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Replying to Hugo Fair:
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By D V Fields
03rd Jan 2023 19:38

£2.9m + for following years’ audits seems a reasonable gain.
When the general standard of audit offers no benefit to the company and clearly offers no assurance to the shareholders I increasingly wonder if there is any benefit in audits. I’ve seen independent examination of charity accounts offer more value.

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By JustAnotherUser
04th Jan 2023 09:53

always gets a laugh when I see ...

fine ~ a sum of money exacted as a penalty by a court of law or other authority.

discount ~ deduct an amount from (the usual price of something).

they may just start incentivising this more and do a 'buy one get one free' on future fines.

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