The FRC has published the full report of the Independent Disciplinary Tribunal detailing its findings of misconduct by Deloitte and former partners Richard Knights and Nigel Mercer together with sanctions, in relation to the audits of the published financial reporting of Autonomy Corporation plc.
The FRC previously announced the sanctions on 17 September, but now you can read the tribunals damning final report – 268 pages.
We know that Deloitte received a severe reprimand and was fined £15 million for “serious and serial failure to discharge its critical public interest duty to uphold the reliability of the reporting of Autonomy”.
In the view of the disciplinary tribunal these serious and serial failures, and the failures of one of Deloitte’s audit engagement partners (Knights) to act with integrity and objectivity “could seriously undermine confidence in the standards of conduct of members and member firms…and the profession in general”.
While it admitted misconduct charges Deloitte had argued that the starting point for any fine should be in the region of £7 million.
However, the Executive Counsel ruled the case “involves a Big 4 firm guilty of seriously bad incompetence in respect of the audit of a major public company, where the errors were measured in nine figures or more, leading to the risk of widespread losses” (See paragraph 845).
It went on to say it is in the wider public interest that a severe fine be imposed “in a case as bad as this case”.
And, it was pointed out that other firms, which had not committed misconduct, would rightly expect to see the fine imposed on one of the world’s largest accountancy firms to be one reflecting its stature, revenues and profitability. The £15 million fine is 3% of Deloitte’s operating profits for FY19 and less than 0.5% of its revenues for FY19.
The firm has been ordered to provide a Root and Cause Analysis of “the reasons for the misconduct, why the firm’s processes and controls did not prevent misconduct, and whether the firm’s current processes would lead to a different outcome”.
The report also pointed out Deloitte’s relationship with Autonomy was critical to the Cambridge office’s financial success. It was the only FTSE 100 company audited from that office. This meant it was all the more important that Deloitte should be alive to the need to discharge its public interest duty reliability and independently and not yield to actual or apparent client pressure. “Regrettably…it signally failed to do this” (see paragraph 776).
Two partners also appeared before the tribunal. It said Richard Knights’ loss of objectivity on multiple occasions was more serious than ‘mere’ incompetence. He yielded to client pressure when accepting the hardware cost allocations, despite his reservations. Knight was excluded as a member of the ICAEW for a recommended 5-year period and fined £500,000.
Nigel Mercer was given a severe reprimand and fined £250,000.
Deloitte was also ordered to pay £5 million (plus VAT) in court costs.
To read the full report go to: https://www.frc.org.uk/getattachment/f29f4517-5b81-4e54-a0c9-ef67ee487282/Tribunal-report-Autonomy-06-01-21.pdf