The accounting watchdog in England, Financial Reporting Council, found that misconduct by Deloitte led to the collapse of Aero, an aircraft parts wholesaler. The misconduct cost Deloitte £4 million! The fine is the highest recorded by the FRC for misconduct of a firm. This definitely is a message to the audit firms to adhere to the highest standards and know that they are being watched.
Aero at one point was a favorite of the London’s junior market. But after the accounting irregularities were discovered the company’s banks pulled their findings leading to the collapse of the company. The accounting issues interestingtly were found when the company was readying to move to the main market of the stock exchange. During the due diligence auditors raised questions about the book value of its stock and the physical quantities it held. Deloitte that had been the company’s auditor had given the company unqualified opinion during the years in question (2006-2008)!
Deloitte’s response was a classic, “Our audit quality processes have evolved significantly since these audits were performed between 2006 and 2008, and we are relentless in our focus to ensure all our audits are of the highest quality.” Does this mean that all audits the company undertook during the period were substandard audits!
The recent accusation of HP against Autonomy, the British software company that HP bought for $11B, raises fingers in all directions. Who is it at fault- Autonomy management, the management of HP, the auditors, or the differences in the accounting standards? Let’s look at the issue and the various parties involved.
HP wrote down the value of Autonomy on its books from $11B to $2.2B. $5B of the $8.8B write off HP alleges is due to serious accounting improprieties and willful effort by Autonomy to mislead shareholders. According to HP general counsel John Schultz, Autonomy created more than $200 million in revenue over a two-year period from 2009, which would amount to 12.5 percent of Autonomy’s $1.6 billion in revenues in their annual accounts for 2009 and 2010. HP accuses that Autonomy booked licensing revenue upfront before deals closed thereby inflating revenue.
In his defense Mike Lynch, head of Autonomy puts part of the blame on the differences between International Financial Reporting Standards (IFRS) (Autonomy maintained books under IFRS prior to its accusation by HP) and US GAAP (The standard HP uses). IFRS as we know is broader and does not have strict rules; it has more room for interpretation vs US GAAP which is rule based.
The question is when HP was buying Autonomy did they not do their own due diligence. When a company spends $11B, the investors expect that they would have reviewed the financials and done thorough check of the acquiree. Why did HP not look into the books deeper? In their defense HP says they relied on the stamp from the auditors, Deloitte in this case. Isn’t it the duty of the board and management to take an extra step and do their own due diligence!
Next party in this fiasco is Deloitte. Not only is Deloitte auditors of Autonomy but also of HP. The issue raises the topic again whether audited financial statements can be relied on completely. Are auditors doing their job properly, because if they were there would not be such big fiasco every few months?
Well I believe all these parties are to blame, HP for not doing their own due diligence, Autonomy for taking the most lenient interpretation of the standards, and Deloitte for not doing their job properly.
The officials at the Sebewaing Light and Water Department in Michigan, did not pay heed to audit reports that mentioned significant deficiencues in the accounting procedures. These warnings date back to 2006. Finally in May 2012, the auditors noticed that the money deposited into bank account was different from what was booked in accounting books and found an embezzellent of more than $39,000 done by an employee.
Due to shortage of employees, one employee would sometimes deposit the cash, record it and then reconcile it. The detailed duplicate deposit tickets prepared by the cashiers did not contain a listing of the checks. There was no independent review of the bank reconciliations which would perhaps brought this issue to light. The key issues here were segregation of duty and lack of independent review of the financials.
The number might seem small, but consider that the per capita income for the village was ~$17K. A $39K embezzlement definitely could make one person richer!