July 4, 2019 / 4:13 PM / a month ago

Deloitte, partner fined over Serco Geografix audit failures

LONDON (Reuters) - Deloitte and a senior partner have been fined and severely reprimanded for misconduct over the audit of Serco Geografix (SGL), an outsourcer that on Thursday formally settled a six-year criminal investigation into fraud and false accounting.

FILE PHOTO: Offices of Deloitte are seen in London, Britain, September 25, 2017. REUTERS/Hannah McKay/File Photo

Auditing watchdog The Financial Reporting Council said on Thursday it had fined Deloitte 4.23 million pounds ($5.32 million) and audit engagement partner Helen George 97,000 pounds after they admitted misconduct for audits in 2011 and 2012.

The latest fines were announced as a London judge said the subsidiary of Serco, that had been awarded government contracts to electronically tag offenders between 2010 and 2013, committed “deliberate fraud”.

Judge William Davis made the comment as he granted formal approval for a deferred prosecution agreement (DPA) between SGL and the UK Serious Fraud Office (SFO), under which the company will pay a fine of 19.2 million pounds and costs of 3.7 million pounds.

“SGL engaged in quite deliberate fraud against the Ministry of Justice in relation to the provision of services vital to the criminal justice system,” the judge said.

SGL’s parent Serco Group, one of Britain’s largest government contractors, has said the fraud and false accounting offences related to how the company reported to the Ministry of Justice the levels of profitability of its electronic monitoring contract.

The judge said the decision by Serco Group to accept obligations under the terms of the deal had strengthened the public interest in approving the DPA, a court-approved corporate plea-bargaining tool introduced in Britain in 2014.

The SGL penalty comes on top of 12.8 million pounds compensation already paid by Serco to the Ministry of Justice as part of a 70 million pound civil settlement in 2013.

The SFO said its investigation into individuals associated with the case continued. A spokeswoman said on Thursday that a charging decision could come as soon as this year.

In the meantime, detailed facts of the case have not been published.

AUDIT SHAKE-UP

The penalty on Deloitte, one of the world’s Big Four accounting firms with EY, KPMG and PwC, comes at a sensitive time for the audit sector as Britain’s government considers how to implement a proposed sweeping reform of auditing.

Lawmakers have called for a major shake-up of accounting after the failures of retailer BHS and construction company Carillion.

Deloitte said it recognised and regretted its audit work on Serco Geografix had been below the expected standards.

“We have a programme of continuous improvement for our audit quality processes ... We have also specifically agreed with the FRC certain actions focused on learning lessons from the shortcomings in this audit work,” it said in a statement.

Both Deloitte and Helen George qualified for fine reductions after cooperating with the investigation, without which Deloitte’s fine would have been set at 6.5 million pounds and George at 150,000 pounds.

Both parties were sanctioned for failure to act in accordance with the fundamental principle of professional competence and due care.

Deloitte is also paying 300,000 pounds towards the costs of the investigation and has arranged for extra training for audit staff. George remains at the firm.

($1 = 0.7952 pounds)

Additional reporting by Sinead Cruise; Editing by Lawrence White, Mark Potter and Alexandra Hudson

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