Autonomy auditors criticised in FRC investigation

Deloitte’s audits of Autonomy between 2009 and 2011 enabled the firm to “present a misleading picture of its financial position”, found the financial reporting council (FRC).

The watchdog published a report last week detailing its findings from an independent disciplinary tribunal into the investigation of misconduct by Deloitte and former partners, Richard Knights and Nigel Mercer.

“[Autonomy’s] apparent financial results were in fact propped up by undisclosed sales of hardware and sales to value added resellers which were later reversed or replaced,” according to the report.

The former partners were culpable of “serious and serial failures” and had “failed to act with professional scepticism, which is at the heart of an auditor’s role”.

Knights had “bowed to client pressure at exactly the point in time when an audit partner should have resisted”, according to the report.

“[He had] ample opportunity to identify and address the risk the financial reporting review panel would be misled by a description of Autonomy’s business as ‘pure software’”.

Autonomy was acquired by Hewlett Packard (HP) in an $11bn (£8.04bn) deal in August 2011. Shortly after the acquisition, HP suspected financial accounts had been inflated. A forensic review by PwC in 2012 forced HP to write off more than $5bn (£3.6bn) from the deal linked to “accounting misrepresentations”.

In 2015, HP sued former Autonomy founder, Mike Lynch for $5.1bn (£3.7bn) in damages.

In a statement HP welcomed the FRC’s report.

“The findings from the report confirm our view that Autonomy misrepresented its financial performance through a series of calculated sham transactions and the deliberate failure to disclose its substantial hardware reselling business.”

In September 2020 the FRC fined Deloitte £15m.

At the time a Deloitte spokesperson said: “We regret that the FRC Tribunal has ruled that aspects of our audit work on Autonomy between 2009 and 2011 fell below professional standards required.

“Our audit practices and processes have evolved significantly since this work was performed over a decade ago and we continue to transform our audit by investing in firm-wide controls, technology and processes.

“We remain committed to playing our role in delivering change that embraces audit quality, improves choice and restores trust in the profession.”

Knights and Mercer, in September, said they were “disappointed” in the tribunal’s outcome.

“At all times we believe we acted professionally, diligently and in good faith and we disagree with the findings. We are grateful for the full and unwavering support of Deloitte in this matter.”

Knights was fined £500,000 and excluded from the Institute of Chartered Accountants (ICAEW) while Mercer was fined £250,000 and received severe reprimand.