Audit regulators have censured and fined Deloitte & Touche over a series of self-reported accounting errors that led to restatement at technology firm Jack Henry & Associates.
The Public Company Accounting Oversight Board settled charges with Deloitte with a $500,000 civil penalty over material accounting mistakes in three consecutive audits. The Securities and Exchange Commission earlier extracted a $780,000 penalty from Jack Henry for failing to report revenue from software license sales in the correct accounting periods.
The PCAOB says the accounting errors and related audit failures surfaced when the PCAOB notified Deloitte in late 2014 that the Jack Henry audit had been selected for inspection. That prompted the firm to review its work and discover the mistakes, which the firm called to the PCAOB’s attention before the inspection, the board said.
The PCAOB says the firm is responsible for the audit violations because it did not assign someone to the audit who had sufficient software industry experience and knowledge of the relevant accounting rules to properly evaluate the company’s accounting. “Audit quality depends on firms assigning people with the right skills to each engagement,” said William Duhnke, chairman of the PCAOB, in a statement. “Audit firms also should encourage even the most experienced auditors to seek help when the situation requires it.”
Deloitte said in a statement it was pleased to resolve the matter. “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," the firm said.
In 2015, Jack Henry restated its results for fiscal years 2012, 2013, and 2014 to correct for revenue that was recognized earlier than permitted under accounting rules. The SEC said the accounting errors occurred due to inadequate internal controls over revenue recognition reporting.
Software arrangements represent a classic tripping point in revenue recognition accounting rules, with highly prescriptive rules under the historic standard that are meant to curb the potential for abuse. Those rules went away on Jan. 1, 2018, when companies adopted a new standard for revenue recognition, which retained some of the concepts about when and how to recognize revenue on software arrangements but now requires companies to exercise more judgment on when revenue should be recognized.
The PCAOB says Deloitte agreed to the censure and fine without admitting or denying the findings. The board says Deloitte also certified that it had taken measures to assure industry expertise is considered on engagements as part of its audit quality control process. The board says the firm will match engagement partners and quality reviewers to assigned audits and assign reviewers to internal audit inspections with industry expertise in mind, and it will notify the PCAOB staff of any change in that process for three years.