The Financial Reporting Council (FRC) today (17 September) handed Deloitte a record £15m fine for misconduct in the audit of software company Autonomy, which was sold to HP for £8.4bn in 2011. The two former Deloitte partners involved in the audit have been sanctioned: Richard Knights has been excluded from membership of the Institute of Chartered Accountants for five years and fined £500,000, while Nigel Mercer has been fined £250,000 and received a severe reprimand.

The penalties follow an investigation into the audit of the published financial reporting of Autonomy between January 2009 and June 2011, and a seven-week hearing.

Sanctions in full:

  • Deloitte has been fined £15 million, severely reprimanded and has agreed to provide a Root Cause Analysis of the reasons for the Misconduct, why the firm’s processes and controls did not prevent the Misconduct and whether the firm’s current processes would lead to a different outcome.
  • Richard Knights has been excluded from membership of the Institute of Chartered Accountants for England and Wales for five years and has been fined £500,000.
  • Nigel Mercer has been fined £250,000 and received a severe reprimand.

The Tribunal found that Deloitte, Knights and 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,” the findings conclude.

Similarly, in relation to certain of Autonomy’s sales to value added resellers (VARs), the Tribunal found that Deloitte, Knights and Mercer were culpable of misconduct for failing to obtain sufficient appropriate audit evidence and for a lack of professional scepticism in relation to the nature of these sales.  Deloitte and Knights should not have issued an unmodified audit opinion in FY 09 without obtaining further audit evidence, the FRC report says.

The Tribunal said: “It is the wholesale nature of the failure of professional scepticism in relation to the accounting for the hardware sales and the VAR transactions as well as our findings of Misconduct and of breaches of Fundamental Principles that make this case so serious.”

The tribunal ordered that Deloitte pay all the costs of the investigation, amounting to £5,635,014.53.

Deloitte said in a statement: “We regret that the FRC Tribunal has ruled that aspects of our audit work on Autonomy between 2009 and 2011 fell below professional standards required. 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.

“We remain committed to playing our role in delivering change that embraces audit quality, improves choice and restores trust in the profession.”

In a separate statement, Knights and Mercer said: “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.”

The sale of Autonomy has given rise to multiple claims, most recently a £3.8bn civil fraud trial against Autonomy founder Mike Lynch for allegedly inflating the value of Autonomy.