07 Jan 2021
A tribunal report has laid bare how Deloitte and two of its former audit partners succumbed to pressure to help Autonomy meet market expectations.
Autonomy, founded by Mike Lynch, was the sole FTSE 100 audit client of Deloitte’s Cambridge office in 2009, when the software company’s revenue figures began to be bolstered by substantial sales of pure hardware. However, the hardware sales were not disclosed in the 2009 and 2010 financial statements.
The Financial Reporting Council alleged that by allocating the cost of making the pure hardware sales in large part to sales and marketing expenses in the accounts and annual reports, users of the reports were led to believe that the growth in Autonomy’s annual revenue reflected increased sales of its higher-margin software.
In one period, when $28 million of hardware losses were allocated to sales and marketing, gross margin improved from 71 per cent to 86 per cent, according to the FRC. Autonomy was under pressure from City investors to keep showing strong revenue growth.
An independent disciplinary tribunal appointed to investigate a series of allegations by the FRC was shown evidence that despite members of Deloitte raising concerns internally over third-quarter numbers in 2009, Richard Knights, the lead audit engagement partner, told Autonomy he was “totally comfortable” with the figures and discussed with the company what was needed to meet market expectations.
Deloitte was ordered to pay a record £15 million fine by the accounting watchdog for “serious and serial failures” in its audit of Autonomy in September. The accounting firm, Mr Knights, and Nigel Mercer, another former audit partner, were found to have failed to act with “competence and due care and professional scepticism” in their audit of Autonomy’s accounts between January 2009 and June 2011.
The tribunal’s report into its investigations was published yesterday. It found that Deloitte and the two partners were “under pressure from Autonomy” to accept its treatment of hardware costs and revenue from value-added reseller transactions.
The tribunal said Autonomy was critical to Deloitte’s Cambridge office, which “signally failed” to discharge its public interest duty and not yield to “actual or apparent client pressure”.
Autonomy, founded in Cambridge in 1996, grew to become Britain’s largest software developer. Deloitte audited Autonomy’s accounts before the company’s sale to Hewlett-Packard for $11 billion in 2011. A year later $8.8 billion was written off the value of Autonomy, $5 billion of which was attributed to “accounting improprieties”.
Mr Lynch has been accused of fraudulently inflating its value before the sale, which he denies. No representatives of Autonomy provided evidence at Deloitte’s tribunal.
By Louisa Clarence-Smith, The Times, 7 January 2021
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