Deloitte is facing a record £15m fine for “serious and serial failures” in its audits of Autonomy, a former FTSE 100 technology group that was at the centre of one of the biggest accounting scandals in UK corporate history.
An independent tribunal ruled on Thursday that Deloitte, the UK’s second-largest accounting firm by revenues, “signally failed to discharge its public interest duty” when it audited Autonomy in the years prior to its disastrous acquisition by Hewlett-Packard for $11bn in 2011.
The sale was followed by an $8.8bn writedown by HP of the value of Autonomy, a fraud investigation, court proceedings in the UK and US — including against its founder Mike Lynch — and a jail sentence for its former chief financial officer, Sushovan Hussain.
The tribunal found that Deloitte was guilty of “serious audit failings”, including a loss of objectivity, breaching its obligation of integrity, and that it was reckless in its work for Autonomy between 2009 and 2011. The ‘Big Four’ audit firm and its partners Richard Knights and Nigel Mercer advised Autonomy to present its financial performance in a way that was allegedly misleading to investors, the tribunal found. Mr Knights also knowingly failed to amend statements that Autonomy executives made to regulators, it ruled.
“The findings are the most serious ever made against an audit firm in a tribunal report,” said Rebecca Sabben-Clare QC, barrister for the Financial Reporting Council, the UK accounting watchdog, during the hearing. “This was a continuing series of misconduct . . . involving a lack of care and competence by the whole [Deloitte] audit team.”
The FRC has asked the tribunal to impose a £15m fine on Deloitte — which made £617m in profits in the UK last year — and to exclude Mr Knights from the accounting profession for seven years. The FRC said the tribunal should also fine Mr Knights £500,000 and Mr Mercer £250,000.
The sanctions would be the most serious since the FRC fined PwC £10m for misconduct in its audits of retailer BHS in 2018 — which was reduced to £6.5m when PwC agreed to settle with the watchdog — and issued an effective 15-year ban on its lead audit partner Steve Denison.
Deloitte has requested that the fines are about half those the FRC has recommended and said that Mr Knights, who retired from the firm in 2017, would undertake to not sign an audit opinion again. The sanctions will be decided by the tribunal in due course.
The FRC took Deloitte to tribunal on the grounds that its auditors sanctioned misleading disclosures by Autonomy executives that disguised significant losses on the sales of computer hardware by improperly allocating them as marketing costs. “It is plain the sums at risk of these misstatements [on market movements] were easily in the nine figures,” said Ms Sabben-Clare.
The FRC accused Deloitte’s audit partners of becoming too close to Autonomy executives, including Mr Lynch, because the company was the most important client of the Cambridge office where they were based and generated significant fees. The result was that Deloitte “advocated” for the company, rather than challenging its finances, the FRC said.
Deloitte said: “We acknowledge the seriousness of the findings of the FRC tribunal, although it is inappropriate to comment further on the hearing at this stage.
“Deloitte is committed to the highest professional standards in everything it does and our audit practices and procedures have evolved significantly since this work was performed over a decade ago.”
Mr Knights and Mr Mercer, who left Deloitte in 2016, declined to comment.
Mr Hussain was convicted of fraud in the US last year and sentenced to five years’ imprisonment. He is attempting to overturn his criminal conviction and has been granted bail pending his appeal.
Mr Lynch faces 17 charges of securities and wire fraud in the US over the Autonomy deal, which he denies. He is also a defendant in a $5bn civil trial in the UK brought by HP that is awaiting judgment.
This article was revised on 9 July 2020 as to a detail about the tribunal's findings.
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