Deloitte, HP And Autonomy: You Lose Some But You Win Some More, Much More

When HP announced its intention to acquire Autonomy, the British data analysis firm now mired in accusations of serious fraud, Deloitte probably shed some enormous tears of joy. Deloitte was more than happy, I'm sure, to rid itself of the Autonomy audit albatross. That may surprise some of you, since Deloitte UK was the long time auditor of Autonomy, and would lose that job and its nice fees, to HP's auditor Ernst & Young.

To the victor's auditor go the audit spoils.

But that's not how the Big Four audit industry game is played now that consulting is again King. What Deloitte would lose in audit fees - reportedly £5.422m for Autonomy's audits during the last four years  - the firm could now openly replace with guilt-free consulting.

According to filings, Deloitte earned an additional £4.44m from Autonomy in the last four years for services such as tax compliance, due diligence for acquisitions and other services "pursuant to legislation". As the preeminent Big Four tax services provider, HP's auditor Ernst & Young, HP's auditor, would likely start doing everything tax related for Autonomy. However, Deloitte was now free to team with Autonomy and all of its technology products as an alliance partner for systems integration engagements. That could be worth billions in consulting revenue that Deloitte's UK firm, at least, had given up to be the auditor of a fast growing, highly acquisitive technology "Fast 50" firm.

There are differences in the legislation enacted to restore confidence in audits by the United States after Arthur Andersen's Enron piggishness - Sarbanes-Oxley - and the regulations that govern UK listed companies and their auditors. For example, the UK does not bar an auditor from also providing internal audit services to a company it audits.

Regulations in the US and UK do prohibit business alliance relationships between an auditor and its audit client.  The Financial Reporting Council (FRC) is the UK's lead audit regulator. APB Ethical Standard 2, Financial, Business, Employment and Personal Relationships, states:

Audit firms, persons in a position to influence the conduct and outcome of the audit and immediate family members of such persons shall not enter into business relationships with an audited entity, its management or its affiliates except where they involve the purchase of goods and services from the audit firm or the audited entity in the ordinary course of business and on an arm's length basis and which are not material to either party or are clearly inconsequential to either party.

Read this article in its entirety at the re: The Auditors, a blog by Francine McKenna.

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