The Financial Reporting Council (FRC) has brought disciplinary action against Deloitte auditors Richard Knights and Nigel Mercer over their failure to adequately challenge multiple issues with software firm Autonomy’s accounts.
Two former Autonomy finance chiefs, Sushovan Hussain and Stephen Chamberlain, also face action from the watchdog for “acting dishonestly and/or recklessly” in preparing Autonomy’s accounts.
The FRC said a tribunal hearing date will be set “in due course”.
In 2011 Autonomy was bought by Hewlett Packard (HP) for around $11bn (£7.4bn), but just one year later HP said it had uncovered “serious accounting improprieties” which saw the company artificially inflating its value by 80%, leading to a $8.8bn write-down. It was alleged over $5bn of that was attributed to accounting irregularities.
HP said that Autonomy executives manipulated their revenue and quarterly results, “making an accurate valuation impossible.”
The FRC’s investigation related to Autonomy’s financial reporting between 1 January 2009 and 30 June 2011, the years leading up to HP’s purchase, and was carried out with parallel criminal and civil investigations and litigation in the USA.
The FRC said that as auditor Deloitte’s conduct fell “significantly short of the standards reasonably to be expected of a member or member firm of the ICAEW”.
The watchdog alleged that Knights and Mercer failed to challenge Autonomy’s accounting and disclosure of its purchases and sales of computer hardware, as well as its accounting for transactions with value added resellers (“VARs”).
The FRC also alleges that Knights “breached the fundamental principle of integrity” in “recklessly” failing to correct a misleading statement made by Hussain to the FRRP in a meeting in January 2010, and that he failed to act with objectivity.
Transatlantic legal battle spanning several years
In May Sushovan Hussain was convicted of 16 charges relating fraud in the US, which prosecutors claimed amounted to an “unsustainable Ponzi scheme”. Hussain could face up to 20 years in prison, but his lawyers said he intends to appeal the decision.
HP supported the verdict, stating “Mr Hussain engaged in outright fraud and deliberately misled the market about non-existent sales through a series of calculated sham transactions”.
“That Mr Hussain attempted to depict the fraud as nothing more than a misunderstanding of international accounting rules was, and still remains, patently ridiculous – and the jury has now held him accountable for his role in defrauding HP.”
Hussain’s conviction was the first decision in a legal battle spanning several years across the US and the UK.
An investigation opened by the Serious Fraud Office in 2013 closed after two years, finding “insufficient evidence” to prosecute Autonomy’s executive team.
In 2015 HP filed a civil suit worth $5.1bn (£3.6bn) against former Autonomy chief executive Mike Lynch and Sushovan Hussain, the trial of which is due to begin in London’s High Court in 2019.
Lynch earned £500m from Autonomy’s sale and Hussain £10m.
In response, Lynch said HP was looking for a “scapegoat” for its “own errors and incompetence” and filed a countersuit worth $150m (£100m).