Deloitte fined £15m over Autonomy auditing failures

Deloitte has been fined a record £15m and severely reprimanded by the Financial Reporting Council (FRC) for ‘serious and serial failures’ in its auditing of software company Autonomy, including ‘numerous’ examples of misconduct and a lack of professional scepticism

In addition, the Big Four firm 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.

Former Deloitte partners Richard Knights and Nigel Mercer have also been sanctioned. Knights has been excluded from ICAEW membership for five years and has been fined £500,000, while Mercer has been fined £250,000 and received a severe reprimand.

The fines are the outcome of an FRC investigation in relation to the audit of the published financial reporting of Autonomy Corporation for periods between January 2009 and June 2011.

The tribunal found Deloitte, Knights and to a lesser extent Mercer, were culpable of ‘serious and serial failures’ in relation to the ethical standards on integrity, objectivity and independence.

The FRC said the tribunal made numerous findings of misconduct in Deloitte’s audit and review work during 2009 and 2010 relating to the accounting and disclosure of Autonomy’s sales of hardware and to Autonomy’s sales of software licences to value added resellers (VARs).

Knights, and thus Deloitte, were liable for failures to act with integrity and objectivity. Each of Deloitte, Knights and Mercer failed to act with competence and due care and professional scepticism.

Knights was the audit engagement partner in respect of Deloitte’s audit of Autonomy’s financial statements for the year ended 31 December 2009.  The findings against Knights relate to the 2009 audit and his conduct from January to July 2010. 

Mercer was the audit engagement partner in respect of Deloitte’s audit of Autonomy’s financial statements for the year ended 31 December 2010.  The findings against Mercer relate to the 2010 audit and certain of his conduct during 2011.

The tribunal found that each of Deloitte, Knights and 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, Knights and 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, Knights and 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 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 Knights and Mercer of Autonomy’s communications with its regulator, the FRC’s Financial Reporting Review Panel (FRRP), in January 2010 and March 2011 respectively.  Knights acted recklessly and thus here with a lack of integrity. Mercer failed to act with professional competence and due care.

Finally, 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 stated: ‘The findings of loss of objectivity and lack of integrity against Mr Knights and Deloitte are particularly serious and unusual.’

Deloitte has been ordered to pay all of the costs of the investigation claimed by the FRC’s Executive Counsel, amounting to £5.6m, together with the costs of the tribunal.

Elizabeth Barrett, FRC 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. 

‘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.’

In a statement, Deloitte 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.’

A statement on behalf of Knights and Mercer said: ‘We are disappointed that the tribunal has criticised our conduct and certain judgements we made in 2009 to 2011. 

‘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.’


Autonomy’s accounting practices came under the spotlight after the UK start-up was bought by HP for $11bn in 2011.  The US tech giant wrote down $8.8bn the following year, of which $5bn related to alleged accounting irregularities and alleged misrepresentation of how software rental and acquisitions were shown.

HP went on to allege that Autonomy founder Mike Lynch and chief financial officer Sushovan Hussain had artificially inflated the value of Autonomy before the sale, something which both men have vigorously denied.

There have since been a number of court cases over the allegations in both the US and the UK. Hussain was convicted on 16 counts of fraud in a US court in April 2018 and has launched an appeal. Lynch has faced a challenge in the UK High Court which is ongoing.

The FRC’s Autonomy investigation, which began in May 2018, was its longest contested hearing to date, involving a vast amount of material and evidence.

The regulator originally said it would investigate Hussain’s work as CFO and also that of Stephen Chamberlain, the company’s former vice president of finance, alongside Deloitte and the two audit partners. It subsequently announced that this part of the inquiry would be paused pending the outcome of the legal proceedings.

Deloitte’s £15m sanction is the largest ever handed out by the regulator.  In 2013 Deloitte was given a £14m fine in relation to its auditing of MG Rover, but this sanction was subsequently reduced to £3m on appeal.

In 2019, PwC was fined £10m, reduced to £6.5m on settlement, for failures in its auditing of BHS.

The FRC has not published the report of the tribunal at this time.

Note: On 6 January 2021, the FRC published the final tribunal report on the Autonomy Deloitte investigation. This runs to 270 pages and focuses on the key issues raised at the disciplinary.

Pat Sweet |Reporter, Accountancy Daily [2010-2021]

Pat Sweet was the former online reporter at Accountancy Daily and contributor to the monthly Accountancy magazine, pub...

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