The Public Company Accounting Oversight Board censured Deloitte & Touche LLP and imposed a $500,000 penalty against the Big Four firm for overlooking material accounting errors during three consecutive audits of Jack Henry & Associates, Inc., a Missouri-based IT provider for banks and credit unions.
The PCAOB charged Deloitte with violating its rules and auditing standards in its fiscal year 2012, 2013 and 2014 audits of Jack Henry. It found Deloitte was primarily responsible for the violations because none of the engagement personnel the firm assigned to audits of Jack Henry had enough software industry experience and knowledge (including of the relevant accounting rules) to properly evaluate and audit the accounting for software license revenue.
“Audit quality depends on firms assigning people with the right skills to each engagement,” said PCAOB Chairman William D. Duhnke in a statement. “Audit firms also should encourage even the most experienced auditors to seek help when the situation requires it.”
Problems came to light after the PCAOB informed Deloitte in late 2014 it would be inspecting the Jack Henry audit. In preparation for the inspection, Deloitte reviewed its audit work and discovered errors in how Jack Henry accounted for software license revenue, along with deficiencies in Deloitte’s auditing of that area.
“Consistent with Deloitte & Touche’s commitment to the highest standards of professionalism, we identified this matter ourselves several years ago, took immediate action to remediate it, and cooperated in full with the PCAOB,” Deloitte said in a statement forwarded by spokesman Jonathan Gandal. “We are pleased to have reached this resolution.”
Then in June 2015, Jack Henry restated its financial statements for fiscal years 2012, 2013 and 2014, acknowledging revenue had been prematurely recognized.
Later, in December 2016, the SEC instituted cease-and-desist proceedings and imposed a $780,000 civil penalty against Jack Henry for failing to properly report revenue from its software license sales in the correct accounting periods. The SEC said the company’s failures were caused by inadequate internal control surrounding revenue recognition.
Deloitte consented to the PCAOB’s order without admitting or denying the findings. Along with the censure and fine, Deloitte certified it had enhanced its use of industry expertise as part of its quality control processes in two ways: first, for matching engagement partners and quality reviewers to their assigned audits; and second, for assigning reviewers to internal inspections of audits. Deloitte also agreed to let the PCAOB staff know of any repeal of those enhancements for three years.
