Deloitte fined record £15m in Autonomy audit

Deloitte has been ordered to pay a record £15 million fine for “serious and serial failures” in its audit of Autonomy, the British software company at the centre of one of the country’s largest civil fraud cases.

The accounting firm and two of its former partners were found by a tribunal to have failed to act with “competence and due care and professional scepticism” in their audit of Autonomy’s accounts between January 2009 and June 2011.

Autonomy, founded in Cambridge in 1996 by Mike Lynch, was Britain’s largest software developer. Deloitte audited Autonomy’s accounts before the company’s sale to Hewlett-Packard for $11 billion in 2011. A year later $8.8 billion was written off the value of Autonomy, $5 billion of which was attributed to “accounting improprieties”.

Mr Lynch, 55, has been accused of fraudulently inflating its value before the sale, which he denies. Sushovan Hussain, 56, the former chief financial officer of Autonomy, was found guilty of fraud in the United States in May last year and was sentenced to five years in prison.

An independent disciplinary tribunal has ordered Deloitte, which was severely reprimanded, to carry out a “root-cause analysis” of the reasons of its misconduct.

Richard Knights, the lead audit partner, has been excluded from membership of the Institute of Chartered Accountants for England and Wales for five years and was fined £500,000. Nigel Mercer, the second audit partner, has been fined £250,000 and received a severe reprimand.

The previous highest financial sanction by the Financial Reporting Council was £10 million, imposed on PWC over its audit of BHS, the former department stores chain. That fine was later discounted to £6.5 million for early settlement.

Deloitte also has been ordered to pay the £5.6 million cost of the FRC inquiry.

The tribunal found misconduct in Deloitte and the former partners’ audit work relating to the accounting and disclosure of Autonomy’s sales of hardware. “They failed to exercise adequate professional scepticism and to obtain sufficient appropriate audit evidence,” the FRC said. “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 tribunal also found that Deloitte and the former partners had failed to obtain sufficient appropriate audit evidence and had shown a lack of professional scepticism in relation to Autonomy’s sales to value-added resellers.

Mr Knights was culpable of further misconduct for a loss of objectivity on six separate occasions during his audit and review work from October 2009 to July 2010. “The findings of loss of objectivity and lack of integrity against Mr Knights and Deloitte are particularly serious and unusual,” the tribunal found.

By Louisa Clarence-Smith, The Times, 17 September 2020