The UK’s Financial Reporting Council (FRC) has fined Deloitte £6.05 million over failures in its audits of transport operator Go-Ahead Group, including its failure to challenge the wrongful retention of more than £30 million in public funds.
The sanctions, announced on 8 October, relate to Deloitte’s audits of Go-Ahead’s consolidated financial statements for five consecutive financial years, from 2016 to 2020.
The original £11 million penalty was reduced by 45%: 10% for exceptional cooperation and 35% for admissions and early resolution. Deloitte also received a severe reprimand, while the FRC declared that its audit reports for all five years failed to meet the relevant requirements.
Public money retained and profits overstated
The most significant findings concern two Go-Ahead rail subsidiaries, London & South Eastern Railway (LSER) and London & Birmingham Railway (LM).
LSER had received erroneous overpayments from the Department for Transport before Deloitte became Go-Ahead’s auditor. Although contractually obliged to repay the money, the subsidiary retained it without informing the department.
The practice continued during Deloitte’s appointment. LSER released £2.4 million of the overpayments into profit in 2016 and recorded a further £27 million in accruals between 2016 and 2020 under a subsequent franchise agreement.
According to the FRC, evidence obtained from management during later audit years suggested an intention to release these additional amounts into profit if the overpayments were not discovered by the department.
In 2019 and 2020, LSER also classified the accruals in its financial statements in a way that concealed their true nature.
At LM, a separate rail subsidiary, £5.6 million in accruals relating to money owed to the government was released into profit in 2020. The FRC found that LM attempted to conceal the release through the wording of its financial statement disclosures.
The regulator concluded that Deloitte failed to investigate sufficiently, exercise appropriate professional scepticism or adequately evaluate evidence of fraud risk factors.
German rail subsidiary required €40m-plus restatement
The failures extended to Go-Ahead Bayern, a German rail subsidiary.
During the 2020 audit, information initially provided to the auditors indicated that its franchise contracts would generate losses. The German component audit team concluded that a provision for those expected losses was required.
Go-Ahead subsequently provided revised information that changed the projected value of future cash flows from a loss of €8 million to a positive €3 million.
The FRC found that Deloitte did not adequately scrutinise the revised evidence or sufficiently oversee the German audit team.
Although an €8.1 million provision was eventually recognised, it was restated to €49.5 million in the following year’s financial statements — an increase of €41.4 million.
Regulator identifies repeated failures
The FRC said that some of Deloitte’s breaches persisted across all five audit years, despite the relevant matters having been identified as significant audit risks.
Penrose Foss, the FRC’s Executive Counsel and Executive Director of Investigations and Enforcement, described the findings as a “highly concerning pattern of failure” by Deloitte to scrutinise questionable decisions and actions.
The regulator said the failures were particularly troubling because substantial amounts of taxpayers’ money had been placed at risk.
When the Department for Transport discovered LSER’s conduct in 2021, it took action to recover the overpayments, imposed a £23.5 million financial penalty and decided not to renew the subsidiary’s rail franchise.
Deloitte’s response
Deloitte acknowledged shortcomings in its audit work.
A Deloitte UK spokesperson said the firm regretted that aspects of its work had failed to meet expected standards, adding that it had learned from the matter and remained committed to improving audit quality.
In addition to the fine and reprimand, Deloitte must submit a report to its FRC supervisor detailing its root-cause analysis, remedial measures and evidence assessing whether those measures will prevent similar failures.
Deloitte has also paid the regulator’s investigation costs.
The FRC opened its investigation in April 2022. Its original scope included Go-Ahead’s 2021 audit, but that part of the investigation was closed in December 2024 without enforcement action.
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About the author: Claudine Cassar is the founder and editor of Big4News, covering audit, consulting, regulation and governance across Deloitte, PwC, EY and KPMG.