The U.K. Financial Reporting Council (FRC) on April 21 announced a reduced penalty of 1.45 million pounds (U.S. $1.8 million) against Deloitte regarding goodwill testing failures during its audit of facility management company Mitie Group for fiscal year 2016.
The Big Four firm received a severe reprimand but avoided a £2 million (U.S. $2.5 million) sanction for admissions and other mitigating factors. Deloitte was further required to report to the FRC on remedial actions taken regarding audits of goodwill and declare its audit report at Mitie Group did not meet relevant requirements.
Deloitte engagement partner John Charlton was also reprimanded in the case, receiving a discounted penalty of approximately £40,000 (U.S. $50,000).
The details: Deloitte has served as Mitie Group’s auditor since the company was first listed on the London Stock Exchange in 1988. FY2016 represented Charlton’s first year as the audit engagement partner, according to the FRC.
In the years preceding FY2016, Mitie Group’s healthcare business “had been deteriorating for some time, and it had repeatedly missed budgets and forecasts set by the company,” the FRC explained in its decision notice. With this information, Deloitte assessed the recoverability of goodwill and intangible assets within the company’s healthcare business as a “significant risk” for its FY2016 audit, the FRC stated.
When Mitie Group’s 2016 financials attributed £465.5 million (U.S. $586 million) to the value of goodwill—£107.2 million (U.S. $135 million) of which was attributed to the healthcare division—Deloitte did not properly test the numbers, according to the FRC. Specifically, the firm “failed to obtain sufficient audit evidence to gain appropriate comfort regarding the future cashflows and the discount rate used in the impairment model; failed to give sufficient consideration to the impact of working capital; failed to exercise sufficient professional skepticism; failed adequately to document their audit work in relation to the discount rate; and allowed inadequate disclosures and incomplete statements to be included in the auditor’s report.”
Deloitte should have concluded Mitie Group’s determinations were materially overstated, according to the FRC, which might have resulted in goodwill in the company’s healthcare business being treated as impaired at the end of the fiscal year.
Deloitte was lauded for accepting the deficiencies in its work, which the FRC noted the firm did not stand to benefit from financially. The errors were identified in just the one part (healthcare) of the FY2016 audit and were not found to be intentional, dishonest, or reckless. Charlton was further acknowledged for using the experience as a learning experience in mentoring his colleagues.
“We regret that a specific part of our FY16 audit of Mitie Group plc, related to the impairment testing of goodwill in Mitie’s healthcare division, fell short of the standards expected,” said a Deloitte UK spokesperson in an emailed statement. “Both the audit partner and the firm have learned from this process and have taken significant steps to address this issue. We remain committed to audit quality and its continuous improvement.”