The auditors for tech giant Autonomy failed to challenge bosses at the company ahead of its ill-fated £7.4 billion sale to Hewlett Packard, a disciplinary tribunal has heard.
Auditing firm Deloitte was accused of not meeting expected standards as a hearing against two of the company’s auditors opened in London on Thursday.
Lawyers for the Financial Reporting Council (FRC), which regulates the accounting sector, accused Richard Knights of failing to be objective when he audited accounts that are now at the centre of Britain’s largest ever fraud trial.
A tribunal on Thursday heard that Mr Knights had not challenged false claims by Autonomy, a British software company which was sold to US giant HP in 2011.
Lawyers allege that, among other things, the company tried to pass itself off as a supplier of software, while not disclosing the sales of computer hardware which made up between 5% and 19% of revenues.
Autonomy claimed its adjusted gross margins were 88%, inside the target of 88% to 92%. Costs for buying hardware were assigned to the sales and marketing budget. If it had been properly accounted for Autonomy would have missed its target, with 83% gross margins, the tribunal heard.
“That, we suggest, would have shocked the market,” said Rebecca Sabben-Clare, lead counsel for the FRC.
The charges go back to between 2009 and 2011, pre-dating HP’s 11 billion US dollars (£7.4 billion) acquisition of Autonomy. After the deal HP was forced to write off three quarters of Autonomy’s value, saying there had been fraud in the company.
Sushovan Hussain, Autonomy’s former finance director, was this year convicted of fraud in the US and fined 4 million dollars.
Speaking at the opening of a seven-week tribunal against Mr Knights, Nigel Mercer and Deloitte, Ms Sabben-Clare said that Mr Knights had shown a “fundamental lack of professional scepticism,” and accused him of failing to question Autonomy’s accounts.
“It is our case that Deloitte’s work fell clearly and seriously below the standards to be expected from it,” she said.
Mr Knights and Mr Mercer face sanctions if the tribunal finds them culpable of misconduct. This could include fines and compulsory training.
Deloitte said: “We dispute the FRC’s complaints and will defend ourselves against them at tribunal.”
Ms Sabben-Clare said that Hussain had told the FRC in a 2011 meeting that Autonomy was a pure software business with less than 5% of revenues coming from services.
“It was reckless for Mr Knights not to correct that statement,” said Ms Sabben-Clare.
The tribunal continues.