Deloitte has been ordered to pay a fine and costs of more than £2mn by the UK accounting regulator after admitting rule breaches during its audit of outsourcing group Mitie.

The Financial Reporting Council found that the Big Four firm failed in its audit of the FTSE 250 company’s impairment testing of goodwill, which was its biggest asset, resulting in at least one material misstatement in its accounts for the year ended in March 2016.

It is the second time in nine days that Deloitte has fallen under the regulator’s microscope, following the FRC’s announcement of a separate investigation into the firm’s audits of bus and rail operator Go-Ahead Group over a record six-year period.

The fine is the latest in a series of regulatory actions over the audits of large contractors.

KPMG remains under investigation for its work checking the accounts of Carillion before it collapsed in 2018, while probes into PwC’s audits of contractors Kier, Galliford Try and Babcock have been revealed since January. Grant Thornton was fined £700,000 in November for audit failures at Interserve, the former FTSE 250 outsourcer that fell into administration in 2019.

Deloitte was fined £2mn over the audit of Mitie, reduced to £1.45mn for its early admissions. The firm was paid £974,000 by Mitie during the year in which the failures occurred, including £766,000 in audit fees. It had audited the company since it listed on the London Stock Exchange in 1988.

John Charlton, the lead audit partner, was fined £65,000, reduced to £40,000 for co-operation and for his subsequent efforts to improve the firm’s auditing. Deloitte’s partners were paid an average of more than £1mn in the year to May 2021.

Deloitte and Charlton were ordered to pay an additional £658,000 towards the costs of the investigation.

The failings related specifically to the audit of goodwill in Mitie’s healthcare division, which operated care homes. Goodwill is an intangible asset representing the amount a company pays to acquire another business over and above the net assets of that business.

Goodwill in the healthcare unit was valued at £107.2mn and arose mostly from the acquisition of another business in 2012. The recoverability of this amount was identified by Deloitte as a significant risk in its audit and “was clearly an area that required robust and rigorous audit work”, the regulator said.

However, it found that the auditor failed to obtain sufficient evidence regarding the future cash flows and the discount rate used in Mitie’s impairment model. It also failed to exercise sufficient professional scepticism or properly document its work, and some disclosures in its audit report were insufficient, the FRC 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,” said Claudia Mortimore, the FRC’s deputy executive counsel.

Deloitte said it regretted that its auditing of Mitie’s impairment testing of goodwill “fell short of the standards expected”. 

It added: “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.”

The firm was ordered to report to the watchdog on the impact of its remedial measures and to provide evidence of whether they had resulted in better quality work.

The FRC acknowledged that the failings related to only one part of the audit in a single year and the breaches by Deloitte were not intentional, dishonest or reckless.

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