Regulator hits Deloitte with sanctions over audit breaches

The Financial Reporting Council (FRC) has imposed fines and reprimands against Deloitte LLP and audit engagement partner Simon Manning.

The Final Settlement Decision Notice issued by the regulator’s Executive Counsel relates to the statutory audit of the financial statements of Sheffield-headquartered building materials distribution business SIG plc for the financial years ended 31 December 2015 and 31 December 2016.

Deloitte and Manning admitted two breaches of Relevant Requirements related to the audit of supplier rebates and cash.

The sanctions are:

Against Deloitte,

·    A financial sanction of £1,250,000 (discounted for admissions and early disposal to £906,250);

·    A published statement in the form of a Severe Reprimand;

·    A declaration that the 2015 and 2016 audit reports signed on behalf of the firm did not satisfy the Relevant Requirements; and

·    An order requiring the firm take specified action to mitigate the effect or prevent the occurrence of the contravention.

Against Manning,

·    A financial sanction of £50,000 (discounted for admissions and early disposal to £36,250); and

·    A published statement in the form of a Severe Reprimand.

The FRC said that in respect of supplier rebates – financial incentives paid to SIG by its suppliers, to encourage the company to purchase the suppliers’ goods – Deloitte and Manning failed to obtain and document sufficient appropriate audit evidence in respect of the testing of rebate terms as set out in SIG plc’s rebate workbooks, and the testing of rebate debtor balances.

It notes they also did not exercise “sufficient professional scepticism” by failing to investigate indications that rebate debtor balances may have been overstated.

The regulator added that in relation to cash, Deloitte and Manning failed to obtain sufficient appropriate audit evidence in respect of cheque payments made around the year-end.

And they did not demonstrate sufficient professional scepticism by failing to investigate indications that cheque payments claimed to have been made post-year-end should properly have been regarded as pre-year-end payments.

The FRC said Deloitte and Manning co-operated with its investigation and admitted the breaches.

Jamie Symington, deputy executive counsel, said: “These breaches concerned two discrete areas of the audit of a particular subsidiary of SIG plc.

“They involved contraventions of requirements which are fundamental to the role of the independent auditor, and were associated with material misstatements in SIG plc’s accounts which had to be corrected.

“The breaches in respect of supplier rebates were made all the more serious by the fact that the FRC had highlighted these complex supplier arrangements as requiring particular attention from auditors.”

A spokesman for Deloitte UK responded: “We are disappointed that our work on the FY15 and FY16 SIG plc audits – relating to the audit of supplier rebates and cash – fell short of the high standards expected of us.

“We have learnt from the matters identified by the FRC and remain committed to audit quality and its continuous improvement.”