Deloitte auditor accused of recklesness at FRC tribunal
On the first day of the long-running Financial Reporting Council's disciplinary tribunal, Deloitte's auditors have been called "reckless" and subjective by the Council.
The Financial Reporting Council has begun its disciplinary tribunal of software company Autonomy’s auditing, saying that Deloitte’s auditors fell short of their responsibilities while auditing the company.
The proposed seven-week tribunal began on 10 October, with the regulatory body bringing disciplinary proceedings against Richard Knights, ex-partner Nigel Mercer and Deloitte.
Knights, Mercer and Deloitte are all facing allegations of misconduct, coming from their 2009 – 2011 audits of Autonomy.
On the first day of the disciplinary tribunal, Knights was accused by the FRC of having “consciously lost his objectivity” and been both “reckless” and “seriously misleading” during his auditing relationship with the FTSE 100 Autonomy.
At the tribunal’s opening, lead counsel for the FRC, Rebecca Sabben-Clare, said: “It is our case that Deloitte’s work fell clearly and seriously below the standards to be expected from it.”
The tribunal heard that Knights did not challenge Autonomy’s false claims before its £7.4bn sale in 2011 to Hewlett Packard, and that it misrepresented its revenue sources.
Where do the allegations come from?
After the HP sale, Autonomy’s new owners wrote off £3.9bn of Autonomy’s value and claimed that there had been fraud in the company.
This was found true following a 2019 investigation, and Autonomy’s former finance director, Sushovan Hussain, was convicted of fraud in the United States and ordered to pay a $4m fine.
According to Sabben-Clare, Hussain had told the FRC back in 2011 that Autonomy was a solely software-focused business, with only 5% of its revenue coming from service
Another one of Autonomy’s former executives, Mike Lynch, is still facing 17 charges of fraud in the US regarding his former chief executive officer role within the Autonomy sale.
Because Autonomy was a key client for Deloitte’s Cambridge-based auditors, the FRC has alleged Deloitte’s independence was jeopardised, leading to less scepticism over its valuation.
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However, the FT has reported that Deloitte refuted these allegations in its court papers, claiming the company “clearly demonstrated appropriate professional scepticism and diligently and properly evaluated the manner in which the costs of the lossmaking hardware sales were allocated.”
If found culpable of misconduct, Knights and Mercer both face sanctions like fines and compulsory training.
The three accused in the FRC tribunal have said the allegations are “wholly devoid of merit,” and Deloitte has said that the company will continue to dispute and defend itself against the FRC’s complaints.