The FRC has fined Deloitte £1.45m and issued it with a severe reprimand over its audit of Mitie Group plc for the financial year ended 31 March 2016. Deloitte will also be required to report to the FRC on the impact of remedial action it has taken since 2016 on its audit of goodwill.
Audit engagement partner John Charlton was fined £40,056,25. He also received a severe reprimand.
Deloitte and Charlton both admitted breaches of relevant requirements relating to their audit of Mitie’s impairing testing of goodwill in the Healthcare Division.
The FY2016 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 FY2016).
Recoverability of the goodwill in the Healthcare Division was identified by Deloitte as a significant risk for the Audit and was also identified in the audit report as one (of two) assessed risks of material misstatement. It was clearly an area that required robust and rigorous audit work.
Despite being aware of the significant risk, the Respondents failed to obtain sufficient audit evidence to gain appropriate comfort regarding the future cashflows and the discount rate used in the impairment model; failed to give sufficient consideration to the impact of working capital; failed to exercise sufficient professional scepticism; failed adequately 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 Respondents’ breaches, the FY2016 financial statements contained a material uncorrected misstatement or misstatements in relation to the headroom and/or carrying amount of the Healthcare Division. If the Respondents had complied with the Relevant Requirements, goodwill in the Company’s Healthcare business might well have been treated as impaired as at the end of FY2016 and deficiencies in the disclosures about Healthcare goodwill would have been detected.
