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Financial Reporting Council slaps Autonomy auditor Deloitte with £15m fine over audit 'misconduct'

Two audits also hit with combined £750k of personal fines by accountacy regulator

Deloitte has been fined £15m by the Financial Reporting Council (FRC) for “serious and serial failures” in its auditing of British software company Autonomy prior to the latter’s acquisition by HP for $11bn.

The FRC not only fined the audit company £15m but also penalised senior audit partner Richard Knights half a million pounds, suspending him from membership of the Institute of Chartered Accountants for England and Wales for five years. He had worked on Autonomy’s accounts between 2005 and 2010.

Knights’ fellow auditor, Nigel Mercer, who took over from Knights in 2010 as “audit engagement partner”, was fined £250,000 and received a severe reprimand. Deloitte must also pay £5m in legal costs claimed by the FRC’s executive counsel.

Elizabeth Barrett, the FRC’s executive counsel, said in a statement: “After lengthy, fully contested proceedings, the Tribunal concluded that the audit work fell significantly short of the standards expected of an audit firm and its partners.”

FRC is not releasing the full judgement but provided a summary here.

The fines will cement the idea in the public mind that Deloitte acted without “competence and due care and professional scepticism” while signing off Autonomy’s accounts, in the words of the FRC. The regulator’s disciplinary tribunal did not hold back in its published findings:

The Tribunal found that each of Deloitte, Mr Knights and Mr Mercer were culpable of Misconduct for failings in the audit work relating to the accounting and disclosure of Autonomy’s sales of hardware during FY 09 and FY 10. They failed to exercise adequate professional scepticism and to obtain sufficient appropriate audit evidence. Deloitte should not have issued unqualified audit opinions in these years based on the audit evidence obtained. Deloitte, Mr Knights and Mr Mercer fell seriously short of the standards to be expected of a reasonable auditor.

Deloitte and its two senior auditors were also found to have committed misconduct by signing off Autonomy’s sales of software licences to its resellers, a practice that Hewlett Packard Enterprise alleged in the High Court was an accounting trick for accelerating quarterly revenues reported to the market rather than recording genuine transactions.

Knights and Mercer said in a statement: “We are disappointed that the Tribunal has criticised our conduct and certain judgements we made in 2009 to 2011. 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.”

A Deloitte spokeswoman was equally vocal, conceding only its “regret” that “aspects” of its work were found by the FRC to have fallen “below professional standards required”, adding: “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.”

And what about Mike Lynch?

As regular Register readers know all too well, Autonomy was bought in 2011 by Hewlett Packard (as was) for $11bn. A year later HP wrote down the purchase by $8bn, declaring that it was the victim of accounting fraud. It then sued former Autonomy C-suite executives Mike Lynch and Sushovan Hussain for £3.3bn, with the case being heard last year. Judgment in the case is still pending.

Lynch, whose court defence to the accounting fraud accusations rested on the argument that it “was acceptable at the time to Deloitte”, declined to comment on today’s fines.

In a witness statement for the High Court proceedings last year he said: “So far as I was concerned as the company's CEO at the time, Autonomy was under no obligation to disclose hardware revenue separately in its accounts. My obligation as CEO was to make sure that the company had appropriate resources and systems in place to comply with its obligations. The company's disclosures were carefully considered by Autonomy's Finance Department and the Audit Committee and were ticked off and signed off by our auditors, Deloitte.”

On accounting for sales to resellers, he told the court: “To my knowledge, neither Deloitte nor the Audit Committee ever indicated that they were uncomfortable with Autonomy's practice of selling to resellers and recognising revenue on the reseller deals on a sell-in basis.”

Lynch is also preparing to fend off an extradition attempt by US authorities, due to begin in earnest in January 2021. He denies several criminal charges of fraud over Autonomy’s accounting, brought in that country by local prosecutors.

His High Court co-defendant, ex-CFO Sushovan Hussain, recently lost his appeal against similar charges and is now serving a prison sentence.

The Register has asked HPE to comment on the £15m fine in the context of its $10bn + purchase of Autonomy. HPE said it has no comment. ®

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