The Financial Reporting Council, in the form of the Executive Counsel, has fined Deloitte £6m and imposed sanctions over its audit of Go-Ahead Group plc (GAG).
The financial penalty was discounted from £11m, and Deloitte also received a severe reprimand, and ordered to prepare a report setting out the root cause analysis and actions taken. Deloitte has also paid the costs of Executive Counsel’s investigation.
GAG is a major international transport business, providing bus and rail services in the UK and other markets. Throughout FY16 to FY20 its shares were listed on the London Stock Exchange, and it was therefore a Public Interest Entity for statutory audit purposes.
The breaches relate to three of GAG’s subsidiaries which operated passenger rail services: London & South Eastern Railway Ltd (LSER), London & Birmingham Railway Ltd (LM) and Go-Ahead Bayern GmbH (GABY).
The first subsidiary, LSER, had received erroneous over-payments from the Department for Transport (DfT) under a rail franchise agreement before Deloitte became GAG’s auditor. Although obliged to repay the overpayments to the DfT, LSER retained the money, made accruals for it and began releasing the accruals to profit, all without informing the DfT. LSER continued with this practice after Deloitte was appointed as auditor, releasing £2.4 million in overpayments to profit in FY16, and accruing for a further £27 million from FY16 to FY20 under a subsequent franchise agreement. Evidence obtained from LSER’s management during the later audit years suggested an intention to release to profit the overpayments relating to this second franchise agreement, if they were not discovered by the DfT.
In addition to failing to tell the DfT about the overpayments, in FY19 and FY20 LSER classified the accruals in its financial statements in a way that disguised their true nature. LSER’s conduct breached terms in the franchise agreements requiring it to act in good faith. When the DfT became aware of LSER’s conduct in 2021, it decided not to renew LSER’s franchise on its expiry, took action to recover the overpayments and imposed a financial penalty of £23.5 million on LSER.
The second subsidiary, LM, also held accruals for sums that the DfT was unaware LM owed to it under a different rail franchise agreement. In FY20, once the franchise had ended, LM released £5.6 million of these accruals to profit, and attempted to conceal this by the way it worded the relevant note in its financial statements.
Deloitte, as auditor, failed to enquire sufficiently into the actions of LSER and LM, failed to apply sufficient professional scepticism, and failed to evaluate the evidence indicating the existence of fraud risk factors. Deloitte failed to appreciate that the company was under a contractual obligation to act in good faith and therefore in relation to LSER to bring the overpayments to the DfT’s attention.
In relation to the third subsidiary, GABY, during the FY20 Audit GAG initially provided information showing that GABY’s franchise contracts would be loss making, and the component audit team in Germany concluded that GAG would need to recognise an onerous contract provision in its financial statements2. However, GAG then provided different information which changed the valuation of the future cashflows from the contracts from a loss of €8 million to a positive value of €3 million.
Deloitte applied insufficient scrutiny to the evidence and explanations purporting to show why an onerous contract provision was not needed. Although a provision of €8.1 million was eventually recognised in the FY20 financial statements, Deloitte applied insufficient oversight of the component audit team and failed to evaluate whether sufficient appropriate audit evidence had been obtained to support it. In the FY21 financial statements, the FY20 provision was restated from €8.1 million to €49.5 million.
Overall, there were numerous breaches of different Relevant Requirements, some of which persisted across five audit years and all of which were in relation to matters that Deloitte had identified as significant audit risks. The sums involved in all the breaches were material, either at the subsidiary or the group level. In the case of LSER and LM, Deloitte failed to challenge the wrongful retention by GAG of over £30 million of public money for an extended period, and in the case of GABY, a restatement was required in FY21 to increase the size of the onerous contract provision by more than €40 million.
Penrose Foss, executive counsel and executive director of investigations and enforcement, said: “These breaches show a highly concerning pattern of failure by Deloitte apply sufficient scrutiny to decisions and actions by GAG which were clearly questionable. The fact that some of these decisions and actions put very large amounts of UK taxpayers’ money at risk is particularly troubling, and this is reflected in the high level of financial sanction imposed.”
