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The Financial Reporting Council (FRC) has issued a financial sanction of £2m against Deloitte LLP and its audit engagement partner, John Charlton, after rule breaches of its audit of outsourcing group Mitie Group plc.
Due to early admissions, the Big Four firm’s fine has been reduced to £1.45m, while Charlton faces a £65,000 fine which has also been reduced to £40,056.25.
The FRC said the audit report of Mitie did not satisfy the Relevant Requirements. The audit in question related to the statutory audit of the financial statements of Mitie for the financial year ended 31 March 2016 (FY16).
Deloitte and Charlton both admitted breaches of Relevant Requirements relating to their audit of the company’s impairment testing of goodwill in the Healthcare Division.
The 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 FY16.
According to the FRC, Deloitte identified that recoverability of the goodwill in the Healthcare Division posed a “significant risk” for the audit, but the firm “failed to obtain sufficient audit evidence to gain appropriate comfort” regarding the future cashflows and the discount rate used in the impairment model.
Deloitte reportedly failed to give “sufficient consideration” to the impact of working capital, failed to exercise professional scepticism, failed 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 breaches, the FY16 financial statements contained a material uncorrected misstatement or misstatements in relation to the headroom and/or carrying amount of the Healthcare Division. The FRC said if Deloitte had complied with the Relevant Requirements, deficiencies in the disclosures about the goodwill of Mitie’s Healthcare business would have been detected.
A spokesperson from Deloitte UK told Accountancy Today: “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.”
