That sound you hear? It’s KPMG leadership breathing a heavy sigh of relief for not being the name attached to audit failure headlines this week. Our lucky winner today is Deloitte.
The Financial Reporting Council has fined Deloitte UK more than £900,000 (a cool $1,081,444 Federal Reserve notes) over its shoddy audit work for building materials supplier SIG. The fine was originally £1.25m (about $1.45m USD) but the FRC decided to go a little easier on Deloitte after the firm admitted the work sucked. Engagement partner Simon Manning was also fined, first £50,000 but then, again, because he accepted that the work fell short of standard the FRC brought that down to £36,250 ($43,500 USD), which is roughly equivalent to the yearly salary of a first-year auditor at Deloitte UK (that is not a joke).
Along with the financial penalties, the FRC imposed several sanctions against both Deloitte and Mr. Manning, most of which involve a public reprimand not unlike the pillories of yore where naughty people would be set up in the town square so the citizenry could point and laugh. These sanctions include a published statement in the form of a severe reprimand, a declaration that the 2015 and 2016 audit reports signed on behalf of the firm did not satisfy the relevant requirements, and an order requiring the firm to take specified action to mitigate the effect or prevent the occurrence of the contravention (a.k.a. “knock it off and don’t do that again ok”). Mr. Manning got off easier than the firm, he racked up just the fine and a published reprimand.
So what happened? Direct from the FRC:
Deloitte and Mr Manning admitted two breaches of Relevant Requirements in relation to the audit of supplier rebates and cash.
In respect of supplier rebates (financial incentives paid to SIG by its suppliers, to encourage the company to purchase the suppliers’ goods), Deloitte and Mr Manning failed to obtain and document sufficient appropriate audit evidence in respect of the testing of rebate terms as set out in SIG plc’s rebate workbooks, and the testing of rebate debtor balances. They also failed to exercise sufficient professional scepticism by failing to investigate indications that rebate debtor balances may have been overstated.
In respect of cash, Deloitte and Mr Manning failed to obtain sufficient appropriate audit evidence in respect of cheque payments made around the year-end, and failed to exercise sufficient professional scepticism by failing to investigate indications that cheque payments claimed to have been made post-year-end should properly have been regarded as pre-year-end payments.
Deloitte and Mr Manning co-operated with the FRC’s investigation and admitted the breaches. The extent and timing of their admissions is reflected in the 27.5% discount which has been applied to the financial penalties.
“We are disappointed that our work on the FY15 and FY16 SIG plc audits – relating to the audit of supplier rebates and cash – fell short of the high standards expected of us,” a Deloitte UK spokesperson said. “We have learnt from the matters identified by the FRC and remain committed to audit quality and its continuous improvement.”
Sanctions against Deloitte LLP and Simon Manning [Financial Reporting Council]