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Deloitte loses fight with regulator over Autonomy and gets £15 million fine

Accounting giant Deloitte today lost its long-running battle with regulators over its botched audits of technology giant Autonomy and was fined a record £15 million and severely reprimanded for misconduct.

The Financial Reporting Council’s sanction came at the end of a years-long investigation into the Big Four accountant and former partners Richard Knights and Nigel Mercer, who it accused of being overly cosy with the company they were supposed to be independently auditing and allowing it to make misleading claims about the strength of its finances.

The fine is the biggest ever, far exceeding the £10 million levied on PWC for its failed audit of BHS. PWC’s sanction was reduced to £6.5 million in return for its early settlement and cooperation with the regulator, but Deloitte disputed the allegations, resulting in the case going to the Tribunal and the firm receiving a far heavy punishment.

The FRC alleged Deloitte allowed the former tech star to hide £118 million loss-making hardware sales before the company was sold to Hewlett Packard for £9 billion. The US giant later wrote off most of Autonomy’s value and launched lawsuits against Autonomy’s founder and boss Mike Lynch.

Accounting regulators had demanded the fine and sanctions in July and today had them upheld and confirmed by the tribunal.

Knights and Mercer continued to protest their innocence today, declaring: “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.”

The accountant was also ordered to provide a “root cause analysis” of the reasons behind its misconduct, how its processes and controls failed to prevent it happening and whether its current systems would have prevented it happening today.

Knights has been excluded from membership 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.

Knights in particular was judged to have failed to act with integrity and objectivity while Deloitte, Knights and Mercer “failed to act with competence and due care and professional scepticism.”

They failed to exercise “adequate professional scepticism and to obtain sufficient appropriate audit evidence” of Autonomy’s sales of hardwar in 2009 and 2010, the tribunal ruled.

Knights was audit engagement partner for the year to 31 December 2009, while Mercer held that role the following year.

The Tribunal said “it is the wholesale nature of the failure of professional scepticism 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”.

The Tribunal also said Knights acted recklessly and Mercer failed to act with professional competetence and due care in their communications with regulators after the audits.

Knights was culpable of further Misconduct for a loss of his objectivity on six separate occasions during his audit and review work from October 2009 to July 2010.

The Tribunal commented that “The findings of loss of objectivity and lack of integrity against Mr Knights and Deloitte are particularly serious and unusual”.

Deloitte was also ordered to pay the FRC’s investigation costs of £5.6 million and the costs of the tribunal.

Elizabeth Barrett, 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 spokesman 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.”

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