The United Kingdom’s Financial Reporting Council issued a report Wednesday on its sanctions against Deloitte, which was hit with a record fine last September of 20.6 million pounds ($28 million), along with two of its former partners, for audits from 2009 to 2011 of a British software company, Autonomy, before it was sold to Hewlett-Packard, which discovered the company had been overvalued.
An independent tribunal set up the FRC issued a
“The full Tribunal Report repays careful study,” said FRC executive counsel Elizabeth Barrett in a statement. “It provides context and detail explaining the gravity and extent of the failings by Deloitte and two of its former partners in discharging their important public interest duty concerning Autonomy’s audits. The report also addresses the expectations of auditors when they are involved in communications with an audited entity’s regulator. The seriousness of the identified failures to act with integrity, objectivity, skepticism and competence resulted in the record fine handed down by the independent tribunal.”
The FRC levied a record fine of 15 million pounds in September (
The tribunal noted that this has been an enormous case, with oral evidence occupying approximately 20 days and it considered voluminous written evidence, with experts’ reports alone running hundreds of pages, and the parties’ written opening and closing submissions running approximately 1,200 pages.
“We are conscious of the fact that the allegations that have been made by the Executive Counsel and the conclusions that we have reached are extremely serious for Deloitte, Mr. Knights and Mr. Mercer,” said the report. “Deloitte is a very large internationally renowned firm. Mr. Knights and Mr. Mercer are both accountants with long experience of auditing. Our findings will inevitably be damaging to their reputations as well as to that of Deloitte. We have not reached our conclusions lightly. But we are also acutely aware that Deloitte, Mr. Knights and Mr. Mercer were under a public interest duty to uphold the reliability of the reporting of Autonomy (which is a FTSE 100 company).”
The tribunal acknowledged that Deloitte did a great deal of careful appropriate work on the Autonomy accounts during the relevant period of 2009 to 2011, but it found fault with its audits of Autonomy’s claims of the revenue earned from value-added resellers and hardware sales. “Many workpapers and reports were written and other detailed documents produced,” said the report. “There was no shortage of effort or manpower. Neither Mr. Knights nor Mr. Mercer was deprived of the resources that they needed to discharge their duties properly. Some of the allegations that we have found proved are the result of mistakes or erroneous judgments which, with the benefit of hindsight, can be seen to have been wrong. It may be said that some of the allegations of failure to exercise professional skepticism fall into this category. But it is the wholesale nature of the failure of professional skepticism 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.”
Deloitte’s U.K. firm said it has improved its audits since its work on Autonomy. “We regret that the FRC Tribunal has ruled that aspects of our audit work on Autonomy between 2009 and 2011 fell below professional standards required,” said a spokesperson for Deloitte U.K. “Our audit practices and processes have evolved significantly since this work was performed over a decade ago and we continue to transform our audit by investing in firm-wide controls, technology and processes. We remain committed to playing our role in delivering change that embraces audit quality, improves choice and restores trust in the profession.”
Deloitte’s former partners expressed their disappointment with the report’s findings. “We are disappointed that the Tribunal has criticised our conduct and certain judgements we made in 2009 to 2011,” said a statement from Knights and Mercer in response to the report. “At all times we believe we acted professionally, diligently and in good faith and we disagree with the findings. We are grateful for the full and unwavering support of Deloitte in this matter.”
HP acquired Autonomy in 2011 for nearly $11 billion in 2011, but later sued Autonomy founder Mike Lynch and former CFO Sushovan Hussain for over $5 billion, claiming they had inflated the value of the company. In 2012, it wrote down Autonomy’s value by $8.8 billion after uncovering the accounting problems.
“HPE welcomes the publication of the Financial Reporting Council report,” said a statement Wednesday from Hewlett-Packard Enterprise. “The findings from the report confirm our view that Autonomy misrepresented its financial performance through a series of calculated sham transactions and the deliberate failure to disclose its substantial hardware reselling business.”
