Sanctions against Deloitte and two audit partners in relation to Autonomy Corporation Plc

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Published: 17 September 2020

The Financial Reporting Council (FRC) today announces 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.

Sanctions

  • 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.

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 performed.”

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).

The findings against Mr Mercer relate to the 2010 audit and certain of his conduct during 2011.

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.

Similarly, in 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 so serious ”.

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 ”.

Costs

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 Tribunal.

Elizabeth Barrett, Executive Counsel, said:

“The 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.