Deloitte has been censured by Britain's audit watchdog after failing to spot a fraud scheme involving more than £30 million of taxpayer funds at the transport operator Go-Ahead Group.
In a final settlement decision notice published on October 8, the Financial Reporting Council found that the Big Four professional services firm had failed to adequately scrutinise the clearly questionable conduct of three Go-Ahead subsidiaries: London & South Eastern Railway, London & Birmingham Railway and Go-Ahead Bayern GmbH.
The scandal came to light in 2021, when the government stripped Go-Ahead of its Southeastern rail franchise after discovering the group had failed to declare more than £25 million in taxpayer funding that should have been returned to the Department for Transport. The department fined the group £23.5 million in 2022 and recovered the overpayments, with the then transport secretary describing the conduct as an appalling breach of trust.
The FRC's investigation focused on what Deloitte's auditors had missed. It found that London & South Eastern Railway had received erroneous overpayments from the Department for Transport under its franchise agreement. Despite being required to repay the funds, the company retained them, made accruals for them, and released £30 million in accruals for profit, all while disguising their true nature in subsequent financial statements. London & Birmingham Railway also held accruals for sums it owed the department under a different franchise deal and similarly attempted to conceal the conduct, which involved more than £5 million.
The regulator concluded that Deloitte had failed to evaluate evidence flagging the existence of fraud risk factors, make sufficient enquiries, apply sufficient professional scepticism or challenge management on the dubious conduct.
In the case of the German subsidiary, Go-Ahead Bayern, the FRC found that management had originally projected the franchise contracts would produce an €8 million loss, but changed the valuation to a positive €3 million after the component audit team recommended an onerous contract provision. The regulator found Deloitte had failed to apply sufficient scrutiny to management's explanations, even while acknowledging that information had been withheld from the auditors.
The then transport secretary Grant Shapps described Go-Ahead's conduct as an appalling breach of trust when the franchise was stripped. While the regulator acknowledged that information had been withheld from Deloitte during the audits, it concluded the firm should have done more to ensure adequate audit evidence had been obtained and maintained better oversight of the German component audit team that had flagged the onerous contract issue.
The decision is the latest embarrassment for Deloitte's audit practice and adds to growing pressure on the Big Four firms over the quality of their work on some of Britain's biggest corporate failures.