The Financial Reporting Council announced £6 million (nearly $8 million USD) in sanctions against Deloitte UK today and honestly, this client sounds like a mess. But messy clients are what Big 4 is supposed to excel at so when they don’t, you get regulators swooping in with a hand slap and a fine that works out to 0.103270224% of the firm’s yearly revenue.
The client is bus and rail company Go-Ahead Group plc (heretofore referred to as GAG not by us but by the FRC) and the audits in question were for the financial years ended 2 July 2016, 1 July 2017, 30 June 2018, 29 June 2019 and 27 June 2020 (FY16 to FY20). The initial investigation also included the year ended 3 July 2021 (FY21), apparently that one was sufficient enough not to warrant an enforcement action.
Drilling down into what tripped Deloitte up reveals a tangle of subsidiaries, overpayments, and accruals (oh my!):
The first subsidiary, LSER, had received erroneous over-payments from the Department for Transport (DfT) under a rail franchise agreement before Deloitte became GAG’s auditor. Although obliged to repay the overpayments to the DfT, LSER retained the money, made accruals for it and began releasing the accruals to profit, all without informing the DfT. LSER continued with this practice after Deloitte was appointed as auditor, releasing £2.4 million in overpayments to profit in FY16, and accruing for a further £27 million from FY16 to FY20 under a subsequent franchise agreement. Evidence obtained from LSER’s management during the later audit years suggested an intention to release to profit the overpayments relating to this second franchise agreement, if they were not discovered by the DfT.
In addition to failing to tell the DfT about the overpayments, in FY19 and FY20 LSER classified the accruals in its financial statements in a way that disguised their true nature. LSER’s conduct breached terms in the franchise agreements requiring it to act in good faith. When the DfT became aware of LSER’s conduct in 2021, it decided not to renew LSER’s franchise on its expiry, took action to recover the overpayments and imposed a financial penalty of £23.5 million on LSER.
The second subsidiary, LM, also held accruals for sums that the DfT was unaware LM owed to it under a different rail franchise agreement. In FY20, once the franchise had ended, LM released £5.6 million of these accruals to profit, and attempted to conceal this by the way it worded the relevant note in its financial statements.
The FRC said that Deloitte, as auditor, “failed to enquire sufficiently into the actions of LSER and LM, failed to apply sufficient professional scepticism [sic], and failed to evaluate the evidence indicating the existence of fraud risk factors. Deloitte failed to appreciate that the company was under a contractual obligation to act in good faith and therefore in relation to LSER to bring the overpayments to the DfT’s attention.”
There’s a third subsidiary as well but you’re already bored by this so go read the FRC notice if you insist on subjecting yourself to further reading on this.
TLDR:
Overall, there were numerous breaches of different Relevant Requirements, some of which persisted across five audit years and all of which were in relation to matters that Deloitte had identified as significant audit risks. The sums involved in all the breaches were material, either at the subsidiary or the group level. In the case of LSER and LM, Deloitte failed to challenge the wrongful retention by GAG of over £30 million of public money for an extended period, and in the case of GABY, a restatement was required in FY21 to increase the size of the onerous contract provision by more than €40 million.
As part of the punishment, Deloitte is to prepare a report explaining how this happened and how they plan to prevent it happening again.
Said FRC’s Penrose Foss, Executive Counsel and Executive Director of Investigations and Enforcement: “These breaches show a highly concerning pattern of failure by Deloitte to apply sufficient scrutiny to decisions and actions by GAG which were clearly questionable. The fact that some of those decisions and actions put very large amounts of UK taxpayers’ money at risk is particularly troubling, and this is reflected in the high level of financial sanction imposed.”
Yeah, we’re certain that 0.1% of revenue is really going to teach them a lesson.
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