PwC is no longer the answer to the trivia question: “Which Big 4 firm in the U.K. received the largest fine from the Financial Reporting Council?” That distinction now belongs to Deloitte.
The Queen’s Deloitte was fined £15 million by the U.K.’s audit cops, as well as ordered to pay an additional £5.6 million to cover the costs of the FRC’s investigation and the costs of an independent disciplinary tribunal, on Sept. 17 for the shoddy auditing of Autonomy, the U.K.-based software company that was acquired by Hewlett-Packard in 2011 and was involved in an epic accounting fraud.
In addition, a couple of former Deloitte partners got their hands slapped by the FRC: Richard Knights was fined £500,000 and has been excluded from membership of the Institute of Chartered Accountants for England and Wales for five years; and Nigel Mercer was fined £250,000 and received a severe reprimand.
As part of Deloitte’s punishment, the firm must provide the FRC with a root-cause analysis of the reasons for the auditing misconduct, why the firm’s processes and controls did not prevent the auditing failures, and whether the firm’s current processes would lead to a different outcome.
The independent tribunal concluded that Deloitte should be held accountable for its bad auditing following a seven-week hearing during October and November 2019; sanctions were determined following a hearing in July 2020, according to the FRC.
Here is the tribunal’s and the FRC’s reasoning on why Deloitte, Knights, and Mercer got punished:
Paragraph 4 of the Auditing Practices Board Ethical Standard 1 on integrity, objectivity and independence provides that:
“Public confidence in the operation of the capital markets and in the conduct of public interest entities depends, in part, upon the credibility of the opinions and reports issued by the auditor in connection with the audit of the financial statements. Such credibility depends on beliefs concerning the integrity, objectivity and independence of the auditor and the quality of the audit work performed.”
The Tribunal found that Deloitte, Mr Knights and to a lesser extent Mr Mercer, were culpable of serious and serial failures in discharge of this public interest duty. The Tribunal made numerous findings of Misconduct. Mr Knights, and thus Deloitte, were liable for failures to act with integrity and objectivity. Each of Deloitte, Mr Knights and Mr Mercer failed to act with competence and due care and professional scepticism. These findings are summarised below.
Mr Knights was the audit engagement partner in respect of Deloitte’s audit of Autonomy’s financial statements for the year ended 31 December 2009 (FY 09). The findings against Mr Knights relate to the 2009 audit and his conduct from January to July 2010. Mr Mercer was the audit engagement partner in respect of Deloitte’s audit of Autonomy’s financial statements for the year ended 31 December 2010 (FY 10). The findings against Mr Mercer relate to the 2010 audit and certain of his conduct during 2011.
The Misconduct arose from Deloitte’s audit and review work during 2009 and 2010 relating to (i) the accounting and disclosure of Autonomy’s sales of hardware and (ii) Autonomy’s sales of software licences to value added resellers (VARs).
The Tribunal found that each of Deloitte, Mr Knights and Mr Mercer were culpable of Misconduct for failings in the audit work relating to the accounting and disclosure of Autonomy’s sales of hardware during FY 09 and FY 10. They failed to exercise adequate professional scepticism and to obtain sufficient appropriate audit evidence. Deloitte should not have issued unqualified audit opinions in these years based on the audit evidence obtained. Deloitte, Mr Knights and Mr Mercer fell seriously short of the standards to be expected of a reasonable auditor.
Similarly, in relation to certain of Autonomy’s sales to VARs, the Tribunal found that Deloitte, Mr Knights and Mr Mercer were culpable of Misconduct for failing to obtain sufficient appropriate audit evidence and for a lack of professional scepticism in relation to the nature of these sales. Deloitte and Mr Knights should not have issued an unmodified audit opinion in FY 09 without obtaining further audit evidence.
The Tribunal commented that “…it is the wholesale nature of the failure of professional scepticism in relation to the accounting for the hardware sales and the VAR transactions as well as our findings of Misconduct and of breaches of Fundamental Principles that make this case so serious”.
The Tribunal also made findings of Misconduct in relation to the consideration by Mr Knights and Mr Mercer of Autonomy’s communications with its regulator, the FRC’s Financial Reporting Review Panel (FRRP), in January 2010 and March 2011 respectively. Mr Knights acted recklessly and thus here with a lack of integrity. Mr Mercer failed to act with professional competence and due care.
Finally, Mr Knights was culpable of further Misconduct for a loss of his objectivity on six separate occasions during his audit and review work from October 2009 to July 2010.
The Tribunal commented that “The findings of loss of objectivity and lack of integrity against Mr Knights and Deloitte are particularly serious and unusual”.
The tribunal’s report has not been made public, thus we don’t exactly know what Knights did on those six occasions to draw the tribunal’s ire.
Up until today, PwC had held the record for largest FRC fine for its magnificent auditing of now-defunct retailer BHS. P. Dubs was fined £6.5 million in June 2018, and audit partner Steve Denison, who was responsible for signing off on BHS’s accounts, was fined £325,000 and received a 15-year ban.