The Financial Reporting Council, Britain’s regulator for accounting and audit, on Thursday, July 4th 2019, penalized and reprimanded Deloitte LLP, the global auditing giant, and one of its partners for shortfalls in its audits of a subsidiary of a U.K outsourcing firm, Serco Group PLC.
Deloitte was charged £6.5 million ($8.2 million) in addition to a “severe” reprimand. The fine was however reduced to £4.225 million as part of the firm’s settlement. Deloitte was also made to pay £300,000 toward the costs of the investigation.
Deloitte’s audit-engagement partner, a one, Helen George was fined £97,000 in respect to the audit of Serco Geografix’s 2011 financial statements.
In addition, Deloitte was made to arrange for all its audit staff to “undergo a training programme (designed to the satisfaction of the FRC) aimed at improving the behaviour that is the subject of the Misconduct.”
“Deloitte and Ms. George failed to act in accordance with the fundamental principle of professional competence and due care,” the FRC said in a statement.
The fine relates to three offences of fraud and two of false accounting committed between 2010 and 2013 related to the reporting to the UK Ministry of Justice (MoJ) of the levels of profitability of Serco’s Electronic Monitoring (EM) contract.
On July 3rd 2019, following an admission of responsibility and a Deferred Prosecution Agreement (DPA) with the UK Serious Fraud Office (SFO), Serco Geografix Ltd (SGL) was also fined £19.2m together with £3.7m related to the SFO’s investigation costs. The fine reflects a discount of 50% as a result of Serco’s self-reporting, as well as its significant and substantial cooperation with the investigation. Additionally, Serco was made to compensate the UK Government in respect of the offences as part of a £70m settlement paid by Serco in December 2013.
“We recognize and regret that our audit work on Serco Geografix Limited in 2011 and 2012 was below the professional standards expected of us,” a Deloitte spokeswoman said. The company said its quality processes have evolved since the audits in question were performed. “We have also specifically agreed with the FRC certain actions focused on learning lessons from the shortcomings in this audit work,” the Deloitte spokeswoman said, according to the Wall Street Journal.
Pressure mounts to split up the “big 4” accountancy firms over substandard work and conflict of interest
The Financial Reporting Council has taken various actions against several audit firms and companies’ internal audit teams in recent months.
In June this year for example, FRC also fined PricewaterhouseCoopers LLP (PwC) and KPMG, two of the world’s largest “big 4” accounting firms £4,550,000 and £6 million respectively for audit breaches in the United Kingdom.
Amidst the improprieties, there is pressure mounting in the UK to split up the “big four” accountancy firms- PwC, EY, Deloitte and KPMG.
The House of Commons business, energy and industrial strategy select committee- in November 2018, recommended that UK’s Competition and Markets Authority (CMA) should break up the “big four” so as to avoid a repeat of a string of serious audit failures that have deeply undermined public confidence in the profession.
Although CMA resisted the calls for the breakup of the “big four” yet, it said, this option could be revisited within five years if the profession does not improve.
The CMA instead said that in the face of “serious competition problems” in the sector, the UK government should pass new laws that force accounting giants to put “greater distance between their audit divisions and their more lucrative consulting operations, to prevent conflicts of interest”, according to the Financial Times.
The FRC in their 2017/18 said that 72% of audits done by the 8 biggest audit firms required no more than limited improvements compared with 78% in 2016/17.
The 8 are: KPMG, PwC, Deloitte, Ernst & Young and BDO GT, Mazars and Moore Stephens.
While FRC noted problems at all the “big 4” firms, it singled out KPMG for the consistent poor quality of its work.