Deloitte has been fined £15 million by regulators and blasted for misconduct for its bungled audit of Mike Lynch’s software company Autonomy, prior to its take-over by HP for $11.1 billion in October 2011. (Just 12 months after the takeover, HP was forced to write down Autonomy’s value by $8.8 billion, blaming accounting improprieties.)
Deloitte “failed to act with competence and due care and professional scepticism” industry regulator the FRC said today in a blistering report.
The catastrophic takeover bid triggered a spate of lawsuits, with US federal prosecutors also charging Mike Lynch with fraud in November 2018. (His lawyers say the claims “amount to a business dispute over the application of UK accounting standards, which is the subject of a civil case with HP in the courts of England, where it belongs.”)
A judgement is now pending after UK’s largest ever civil fraud trial between HP and Autonomy and expected soon. HP is seeking some $5 billion in damages.
The Financial Reporting Council (FRC) is the body that regulates auditors, accountants and actuaries, and sets the UK’s Corporate Governance and Stewardship Codes.
In a fiercely worded statement, it today said that Deloitte and two former partners, Richard Knights and Nigel Mercer, were “culpable of misconduct for failings in the audit work relating to the accounting and disclosure of Autonomy’s sales of hardware during FY 09 and FY 10” and their “serious and serial failures” during the audit.
Deloitte has been fined £15 million, “severely reprimanded” and has agreed to provide a root cause analysis of the reasons for the misconduct, the FRC said, including “why the firm’s processes and controls did not prevent the Misconduct” and, both critically and sceptically, “whether the firm’s current processes would lead to a different outcome.”
Richard Knights has been thrown out of the Institute of Chartered Accountants for England and Wales for five years and has been fined £500,000. Nigel Mercer has been fined £250,000 and “received a severe reprimand” the FRC said in a report published today.
Elizabeth Barrett, FRC Executive Counsel, said: “The significant sanctions imposed by the independent Tribunal and announced today reflect the gravity and extent of the failings by Deloitte and two of its former partners in discharging their public interest duty concerning Autonomy’s Audits. The identified failures to act with integrity, objectivity, scepticism and professional competence go to the heart of audit.
“After lengthy, fully contested proceedings, the Tribunal concluded that the audit work fell significantly short of the standards expected of an audit firm and its partners. The decision serves as an important reminder of the need for auditors to ensure that they conduct audits in compliance with these key audit and ethical requirements and of the consequences when they fail to do so.”
A Deloitte spokesperson said: “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. 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.”