FRC issues penalties

Deloitte hit for £2m and partner fined over Mitie audit

Audit failed to meet required standard

Big Four accountant Deloitte has been fined £2 million, adjusted for admissions and early disposal to £1.45m for its failings in the audit of Mitie Group for the financial year ended 31 March 2016.

Audit engagement partner John Charlton was hit with a £65,000 sanction, adjusted for mitigating factors and admissions / early disposal to £40,056.25.

The final decision of the Financial Reporting Council’s executive counsel includes  a severe reprimand for Deloitte and Mr Charlton and a declaration that the audit report did not satisfy the relevant requirements.

Deloitte and Mr Charlton both admitted breaches of relevant requirements relating to their audit of Mitie’s impairment testing of goodwill in the healthcare division. 

The FY2016 financial statements attributed £465.5m to the value of goodwill – the single largest asset figure in the balance sheet and 37.5% of the total reported assets. Reported goodwill in the healthcare division amounted to £107.2m (23% of the company’s total carried goodwill in FY2016).

Recoverability of the goodwill in the healthcare division was identified by Deloitte as a significant risk for the audit and was also identified in the audit report as one (of two) assessed risks of material misstatement.  It was clearly an area that required robust and rigorous audit work, said the FRC.

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Its report stated that despite being aware of the significant risk, the respondents “failed to obtain sufficient audit evidence to gain appropriate comfort regarding the future cashflows and the discount rate used in the impairment model.”

It also “failed to give sufficient consideration to the impact of working capital; failed to exercise sufficient professional scepticism; failed adequately to document their audit work in relation to the discount rate; and allowed inadequate disclosures and incomplete statements to be included in the auditor’s report.”

Due to the respondents’ breaches, the FY2016 financial statements contained a material uncorrected misstatement or misstatements in relation to the headroom and/or carrying amount of the healthcare division.  If the respondents had complied with the Relevant Requirements, goodwill in the Company’s Healthcare business might well have been treated as impaired as at the end of FY2016 and deficiencies in the disclosures about healthcare goodwill would have been detected. 

The Executive Counsel recognises, however, that the breaches relate to one audit year and only relate to one part of the audit.

It also accepts  there is no suggestion that the breaches were intentional, dishonest or reckless; and there was no financial benefit to the respondents, aside from the payment of the audit fee to Deloitte.

The financial sanctions have been discounted by 27.5% to reflect the stage at which admissions were made.

The Executive Counsel has allowed a further 15% reduction for mitigation in relation to Mr Charlton to reflect his constructive response to the AQR inspection and follow-on investigation, including: taking active remedial steps to enhance his skills and developing a more challenging mindset to his own audit work; mentoring and coaching Deloitte audit teams on his experience and learnings from the FY2016 Audit; and helping to develop firm-wide improvements to the quality of audits. 

Claudia Mortimore, Deputy Executive Counsel, said: “It is vital that audit work in relation to the carrying amount of goodwill is conducted properly and the disclosures are sufficient to enable investors to understand the position and have confidence in the numbers included in the financial statements. 

“Deloitte has accepted that there were deficiencies in its audit work of goodwill in Mitie’s FY2016 financial statements. 

“Since 2017, Deloitte has introduced a number of initiatives seeking to improve the quality of audit work related to goodwill and impairment. 

“In addition to the financial sanction, Deloitte is required to report to the FRC on the efficacy of the initiative and, importantly, to provide empirical evidence as to whether they are leading to improvements in quality.”

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