The UK’s audit watchdog has fined Big Four accountancy firm Deloitte and audit partner John Charlton over a raft of failures in its audit of the accounts of outsourcing company Mitie.
The UK’s Financial Reporting Council (FRC) fined Deloitte £2m and Charlton a furth £65,000 after discovering a number of “deficiencies” in the audit of Mities FY2016 accounts.
In auditing Mitie’s 2016 accounts, Deloitte failed to apply sufficient scrutiny to Mitie’s financial reports and failed to “exercise sufficient professional skepticism,” the FRC said.
The FRC explained the breaches came after Mitie recorded £465.5m in “goodwill” in its FY2016 accounts, as it claimed Deloitte and Charlton had failed to properly scrutinise the sum.
In Mitie’s FY 2016 accounts, the £465.5m goodwill figure was the single largest figure on its balance sheet, in representing 37.5 per cent of the company’s total assets.
In accounting, goodwill are intangible assets – such as increased brand recognition – that may provide future economic benefits that have been gained through the acquisition of another company.
The watchdog said there is no suggestion the breaches were “intentional, dishonest, or reckless” as it noted the breaches only relate to a single part of Deloitte’s audit of Mitie’s accounts.
However, the FRC said Deloitte and Charlton did fail to meet the relevant requirements in its audit of the accounts as the watchdog said the respondents failed to properly challenge Mitie’s management.
FRC deputy executive Claudia Mortimore 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.”
A Deloitte spokesperson said: “We regret that a specific part of our FY16 audit of Mitie Group plc, related to the impairment testing of goodwill in Mitie’s Healthcare Division, fell short of the standards expected.”
“Both the audit partner and the firm have learnt from this process and have taken significant steps to address this issue. We remain committed to audit quality and its continuous improvement.”