The UK’s Financial Reporting Council (FRC) has penalised Deloitte £6.05m following deficiencies identified in its audits of transport operator Go-Ahead Group (GAG) between the 2016 and 2020 financial years.
The accountancy watchdog’s executive counsel concluded its formal inquiry into the multi-year audits by issuing a final settlement decision notice under its audit enforcement procedure.
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The FRC noted that the financial penalty was discounted from an original £11m in recognition of Deloitte’s “exceptional co-operation” and admissions during the process.
Deloitte has also reimbursed the expenditures incurred by the executive counsel throughout the investigation.
GAG is an international transport provider that manages bus and rail services across the UK and other jurisdictions.
The regulatory breaches centred on three of GAG’s passenger rail subsidiaries: London & South Eastern Railway (LSER), London & Birmingham Railway (LM) and Go-Ahead Bayern (GABY).
The sanction against Deloitte relates to erroneous surplus funds paid to LSER by Britain’s Department for Transport (DfT) as part of a rail franchise contract prior to Deloitte taking over audit responsibilities.
LSER retained the excess capital without informing the Transport Ministry, which identified the unreturned sums in 2021 and initiated steps to recover the money.
The second subsidiary, LM, also maintained accruals for funds owed to the DfT under a different rail franchise agreement.
The FRC stated that Deloitte “failed to challenge the wrongful retention by GAG of over £30m of public money for an extended period”.
The regulator further noted that the company did not adequately probe the actions of LSER and LM, fell short in applying an appropriate level of professional scepticism and neglected to assess indicators signalling fraud risks.
Regarding the third unit, GABY, initial disclosures submitted by GAG during the 2020 financial year audit projected that its German rail contracts would operate at a loss.
Consequently, the local component audit team in Germany determined that an onerous contract provision had to be booked in the company’s financial accounts.
GAG subsequently supplied revised documentation that adjusted the projected net cash flows from an $8.9m (€8m) shortfall to a €3m gain.
According to the FRC, Deloitte applied “insufficient scrutiny” to the evidence and explanations that claimed an onerous contract provision was unnecessary.
In total, the regulator highlighted widespread breaches, several of which extended across all five audit periods, each concerning matters Deloitte had formally catalogued as significant audit risks.
FRC executive counsel and investigations and enforcement executive director Penrose Foss said: “These breaches show a highly concerning pattern of failure by Deloitte to apply sufficient scrutiny to decisions and actions by GAG which were clearly questionable.
“The fact that some of those decisions and actions put very large amounts of UK taxpayers’ money at risk is particularly troubling, and this is reflected in the high level of financial sanction imposed.”
