FRC Sanctions Deloitte Over
September 18, 2020
Financial Reporting Council (FRC) made
sanctions against Deloitte and former partners, Richard Knights and
Nigel Mercer, following an investigation in relation to the audit of the
published financial reporting of Autonomy Corporation Plc (Autonomy) for
periods between January 2009 and June 2011 (the Autonomy Audits). An
independent Disciplinary Tribunal made findings of Misconduct following
a seven-week hearing during October and November 2019 and sanctions were
determined following a hearing in July 2020.
- 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
- Richard Knights has
been excluded from membership of the Institute of Chartered
Accountants for England and Wales for five years and has been fined
- Nigel Mercer has
been fined £250,000 and received a severe reprimand.
Findings of Misconduct
Paragraph 4 of the Auditing Practices Board Ethical Standard 1 on
integrity, objectivity and independence provides that:
“Public confidence in the operation of the capital markets and in the
conduct of public interest entities depends, in part, upon the
credibility of the opinions and reports issued by the auditor in
connection with the audit of the financial statements. Such credibility
depends on beliefs concerning the integrity, objectivity and
independence of the auditor and the quality of the audit work
The Tribunal found that Deloitte, Mr Knights and to a lesser extent Mr
Mercer, were culpable of serious and serial failures in discharge of
this public interest duty. The Tribunal made numerous findings of
Misconduct. Mr Knights, and thus Deloitte, were liable for failures to
act with integrity and objectivity. Each of Deloitte, Mr Knights and Mr
Mercer failed to act with competence and due care and professional
scepticism. These findings are summarised below.
Mr Knights was the audit engagement partner in respect of Deloitte’s
audit of Autonomy’s financial statements for the year ended 31 December
2009 (FY 09). The findings against Mr Knights relate to the 2009 audit
and his conduct from January to July 2010. Mr Mercer was the audit
engagement partner in respect of Deloitte’s audit of Autonomy’s
financial statements for the year ended 31 December 2010 (FY 10).
against Mr Mercer relate to the 2010 audit and certain of his conduct
The Misconduct arose from Deloitte’s audit and review work during 2009
and 2010 relating to (i) the accounting and disclosure of Autonomy’s
sales of hardware and (ii) Autonomy’s sales of software licences to
value added resellers (VARs).
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.
relation to certain of Autonomy’s sales to VARs, the Tribunal found that
Deloitte, Mr Knights and Mr 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 Mr Knights should not have issued an unmodified audit
opinion in FY 09 without obtaining further audit evidence.
The Tribunal commented that “…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
The Tribunal also made findings of Misconduct in relation to the
consideration by Mr Knights and Mr Mercer of Autonomy’s communications
with its regulator, the FRC’s Financial Reporting Review Panel (FRRP),
in January 2010 and March 2011 respectively. Mr Knights acted
recklessly and thus here with a lack of integrity. Mr Mercer failed to
act with professional competence and due care.
Finally, Mr Knights was culpable of further Misconduct for a loss of his
objectivity on six separate occasions during his audit and review work
from October 2009 to July 2010.
The Tribunal commented that “The findings of loss of objectivity and
lack of integrity against Mr Knights and Deloitte are particularly
serious and unusual”.
The Tribunal ordered that Deloitte pay all of the costs of the
investigation claimed by the FRC’s Executive Counsel, amounting to
£5,635,014.53 (inclusive of VAT), together with the costs of the
Elizabeth Barrett, Executive Counsel, said:
significant sanctions imposed by the independent Tribunal and
announced today reflect the gravity and extent of the failings by
Deloitte and two of its former partners in discharging their public
interest duty concerning Autonomy’s Audits. The identified failures
to act with integrity, objectivity, scepticism and professional
competence go to the heart of audit. 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. The decision serves as an important reminder of the
need for auditors to ensure that they conduct audits in compliance
with these key audit and ethical requirements and of the
consequences when they fail to do so.”
The Report of the
Tribunal is not published at this time.