The U.K. Financial Reporting Council (FRC) on Thursday fined Deloitte a record £15 million (U.S. $19.4 million) for numerous findings of misconduct regarding past audits of British software company Autonomy Corporation.
Two former Deloitte partners have also been fined a combined total of £750,000 (U.S. $970,000). According to the findings of an independent Disciplinary Tribunal, Deloitte and the two former partners were culpable of “serious and serial failures in discharge of this public interest duty.”
Richard Knights was the audit engagement partner for Deloitte’s audit of Autonomy’s financial statements for the fiscal year ended Dec. 31, 2009. According to the FRC, Knights—and, thus, Deloitte—“were liable for failures to act with integrity and objectivity.” The findings against Knights relate to the 2009 audit and his conduct from January to July 2010.
Nigel Mercer was the audit engagement partner for Deloitte’s audit of Autonomy’s financial statements for the year fiscal year ended Dec. 31, 2010. The findings against Mercer relate to the 2010 audit and his conduct during 2011.
Deloitte, Knights, and Mercer “failed to act with competence and due care and professional skepticism,” the FRC said. Knights was fined £500,000 and Mercer £250,000.
According to the Tribunal, the misconduct arose from Deloitte’s audit and review work during 2009 and 2010 relating to the accounting and disclosure of Autonomy’s sales of hardware and Autonomy’s sales of software licenses to value added resellers (VARs). The Tribunal noted failings in the audit work of each year, including not obtaining sufficient appropriate audit evidence with regard to certain VAR sales.
“Deloitte should not have issued unqualified audit opinions in these years based on the audit evidence obtained,” the FRC said. Deloitte, Knights, and Mercer “fell seriously short of the standards to be expected of a reasonable auditor.”
The Tribunal also took issue with Knights’ and Mercer’s consideration of Autonomy’s communications with its regulator, the FRC’s Financial Reporting Review Panel (FRRP), in January 2010 and March 2011 respectively. “Knights acted recklessly and, thus here, with a lack of integrity,” the Tribunal said. “Mercer failed to act with professional competence and due care.”
The Tribunal added that, “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.”
“We are disappointed that the Tribunal has criticised our conduct and certain judgements we made in 2009 to 2011,” Knights and Mercer said in a statement. “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 significant sanctions imposed by the independent Tribunal … 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,” said Elizabeth Barrett, FRC executive counsel. “The identified failures to act with integrity, objectivity, skepticism and professional competence go to the heart of audit.”
In a statement, a spokesperson with Deloitte UK commented, “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.”
In addition to the fine, Deloitte has been “severely reprimanded and has agreed to provide a root cause analysis of the reasons for the misconduct, why the firm’s processes and controls did not prevent the misconduct, and whether the firm’s current processes would lead to a different outcome,” the FRC said.
The Tribunal ordered Deloitte to pay all investigation costs claimed by the FRC’s executive counsel, amounting to £5.6 million (U.S. $7.25 million), together with the costs of the Tribunal.
The Tribunal’s report is not yet published.
Hewlett-Packard purchased Autonomy in 2011 for $11.1 billion. A year later, the company announced in an earnings statement that an internal investigation and forensic review had uncovered “accounting improprieties, misrepresentations, and disclosure failures in Autonomy financial statements prior to 2011 acquisition by HP.”
“HP is extremely disappointed to find that some former members of Autonomy’s management team used accounting improprieties, misrepresentations and disclosure failures to inflate the underlying financial metrics of the company, prior to Autonomy’s acquisition by HP,” the company said. “These efforts appear to have been a willful effort to mislead investors and potential buyers and severely impacted HP management’s ability to fairly value Autonomy at the time of the deal.”
Editor’s note: This story was updated on Sept. 21 to add a response statement from Richard Knights and Nigel Mercer.