Deloitte faces record £15m fine for ‘serious’ failures in Autonomy audits
Tribunal rules UK auditor was guilty of breaching ‘its obligation of integrity’ in work for tech group
Deloitte is facing a record £15m fine for “serious and serial failures” in its audits of Autonomy, a former FTSE 100 technology group that was at the centre of one of the biggest accounting scandals in UK corporate history.
An independent tribunal ruled on Thursday that Deloitte, the UK’s second-largest accounting firm by revenues, “signally failed to discharge its public interest duty” when it audited Autonomy in the years prior to its disastrous acquisition by Hewlett-Packard for $11bn in 2011.
The sale was followed by an $8.8bn writedown by HP of the value of Autonomy, a fraud investigation, court proceedings in the UK and US — including against its founder Mike Lynch — and a jail sentence for its former chief financial officer, Sushovan Hussain.
The tribunal found that Deloitte was guilty of “serious audit failings”, including a loss of objectivity, breaching its obligation of integrity, and that it was reckless in its work for Autonomy between 2009 and 2011. The ‘Big Four’ audit firm and its partners Richard Knights and Nigel Mercer allowed Autonomy to mislead investors by inflating its financial performance, the tribunal found. Mr Knights also knowingly failed to correct false statements that Autonomy executives made to regulators, it ruled.
“The findings are the most serious ever made against an audit firm in a tribunal report,” said Rebecca Sabben-Clare QC, barrister for the Financial Reporting Council, the UK accounting watchdog, during the hearing. “This was a continuing series of misconduct . . . involving a lack of care and competence by the whole [Deloitte] audit team.”
The FRC has asked the tribunal to impose a £15m fine on Deloitte — which made £617m in profits in the UK last year — and to exclude Mr Knights from the accounting profession for seven years. The FRC said the tribunal should also fine Mr Knights £500,000 and Mr Mercer £250,000.
The sanctions would be the most serious since the FRC fined PwC £10m for misconduct in its audits of retailer BHS in 2018 — which was reduced to £6.5m when PwC agreed to settle with the watchdog — and issued an effective 15-year ban on its lead audit partner Steve Denison.
Deloitte has requested that the fines are about half those the FRC has recommended and said that Mr Knights, who retired from the firm in 2017, would undertake to not sign an audit opinion again. The sanctions will be decided by the tribunal in due course.
The FRC took Deloitte to tribunal on the grounds that its auditors sanctioned misleading disclosures by Autonomy executives that disguised significant losses on the sales of computer hardware by improperly allocating them as marketing costs. “It is plain the sums at risk of these misstatements [on market movements] were easily in the nine figures,” said Ms Sabben-Clare.
The FRC accused Deloitte’s audit partners of becoming too close to Autonomy executives, including Mr Lynch, because the company was the most important client of the Cambridge office where they were based and generated significant fees. The result was that Deloitte “advocated” for the company, rather than challenging its finances, the FRC said.
Deloitte said: “We acknowledge the seriousness of the findings of the FRC tribunal, although it is inappropriate to comment further on the hearing at this stage.
“Deloitte is committed to the highest professional standards in everything it does and our audit practices and procedures have evolved significantly since this work was performed over a decade ago.”
Mr Knights and Mr Mercer, who left Deloitte in 2016, declined to comment.
Mr Hussain was convicted of fraud in the US last year and sentenced to five years’ imprisonment. He is attempting to overturn his criminal conviction and has been granted bail pending his appeal.
Mr Lynch faces 17 charges of securities and wire fraud in the US over the Autonomy deal, which he denies. He is also a defendant in a $5bn civil trial in the UK brought by HP that is awaiting judgment.
Gapping down
In reaction to disappointing earnings/guidance:
- BBBY -8.9%, TPB -5.9% (raises Q2 revenue guidance)
Other news:
- GLG -7.8% (files for $100 mln mixed securities shelf offering)
- TPB -5.7% (upsizes offering and prices 8,977,968 shares of its common stock by certain selling shareholders at $32.00 per share)
- OTIC -5.3% (stock offering)
- HQY -1.9% (prices offering of 4,600,000 shares of its common stock at $56.00 per share)
- ALPN -1.6% (files for $60 mln mixed securities shelf offering)
- ZYME -0.8% (signs new license agreement with Merck)
- UAL -0.6% (confirmed it informed ~36,000 U.S.-based employees, either directly or through a union representative, of plans to implement a workforce reduction at their work location)
Analyst comments:
- PLUG -2% (downgraded to Equal Weight from Overweight at Barclays)
- SEAS -2% (downgraded to Neutral from Buy at Janney)
- FUN -1.1% (downgraded to Neutral from Buy at Janney)
- TPIC -1% (downgraded to Neutral from Overweight at JP Morgan)
- WING -0.8% (downgraded to Neutral from Buy at BTIG Research)
- SQ -0.5% (downgraded to Market Perform from Outperform at Cowen)
Gapping up
In reaction to strong earnings/guidance:
- VERI +10.4% (guides Q2 revs above consensus), HELE +7.7%, SAP +6.2% (provides Q2 update, reaffirms 2020 outlook), PTC +4.8% (guides JunQ revs above consensus), UMC +2.9% (June revs), COST +1.8% (June comps)
Other news:
- APDN +17.5% (forms forms clinical testing subsidiary to maximize utility of FDA EUA-approved Linea COVID-19 assay kit)
- OPTN +16.7% (signs co-promotion agreement with kaléo for XHANCE)
- OSMT +5.3% (receives FDA approval for Upneeq)
- CCL +4.4% (Carnival's AIDA Cruises to restart sailing vacations in August; Bookings for the first short cruises start today)
- CRNX +3.7% (receives orphan drug designation from FDA for Paltusotine for treatment of Acromegaly)
- NKLA +3.5% (Worthington (WOR) disclosed the sale of 5 mln shares of Nikola common stock for ~$238 mln in open market transactions from July 6 to July 7, 2020)
- ERI +2.6% (confirms receipt of approval from the Nevada Gaming Control Board)
- PING +1.9% (upsizes offering and prices 8,977,968 shares of its common stock by certain selling shareholders at $32.00 per share)
- NBL +1.9% (provides second quarter update)
- SAR +1.7% (reinstates quarterly dividend)
- HRZN +1.3% (provides Q2 portfolio update)
- ANAB +0.9% (receives orphan drug designation for imsidolimab)
Analyst comments:
- SIX +5.1% (upgraded to Buy from Neutral at Janney)
- PNR +5% (upgraded to Buy from Underperform at BofA Securities)
- IRT +4.1% (upgraded to Overweight from Sector Weight at KeyBanc Capital Markets)
- FFIV +3.4% (upgraded to Overweight from Equal-Weight at Morgan Stanley)
- CRWD +2.8% (upgraded to Neutral from Sell at Citigroup)
- ZS +2.6% (upgraded to Buy from Neutral at Citigroup)
- ADSK +2.5% (upgraded to Outperform from Perform at Oppenheimer)
- FTCH +2.5% (upgraded to Buy from Hold at China Renaissance)
- PTSI +2.2% (upgraded to Buy from Hold at Stifel)
- HOG +2% (upgraded to Buy from Neutral at Northcoast)
- NICE +1.8% (upgraded to Buy from Neutral at Citigroup)
- CSCO +1.6% (upgraded to Overweight from Equal-Weight at Morgan Stanley)
- STZ +1.4% (upgraded to Buy from Hold at Argus)
- BDX +1.3% (upgraded to Overweight from Equal Weight at Barclays)
- REGN +1.2% (upgraded to Buy from Hold at SunTrust)
Pharma industry commits $1bn to fight drug-resistant superbugs
Twenty-three companies join forces to launch a fund to develop new antibiotics by 2030
Twenty-three drug companies have joined forces to invest $1bn in a fund to develop new antibiotics, which are needed urgently to fight the worldwide rise in antimicrobial-resistant superbugs.
The AMR Action Fund, launched on Thursday, aims to support clinical research that will bring two to four new antibiotics to market by 2030. They will target bacteria that cause the most life-threatening diseases and have the greatest resistance to existing drugs.
David Ricks, chief executive of Eli Lilly and chair of the International Federation of Pharmaceutical Manufacturers and Associations, said the fund would “sustain an antibiotic pipeline that is on the verge of collapse, a potentially devastating situation that could affect millions of people around the world”.
According to IFPMA, 700,000 people a year die from infections that cannot be treated because the bacteria have evolved to resist available antibiotics — and “in some of the most alarming scenarios, it is estimated that by 2050 AMR could claim as many as 10m lives per year”.
Among many emerging “nightmare bacteria” are carbapenem-resistant Enterobacteriaceae, which kill up to half of infected patients, and multi-drug resistant Pseudomonas aeruginosa, a leading cause of fatal lung infections in people with cystic fibrosis.
The fund expects to invest in 15 to 20 novel antibiotics that have started clinical trials, of which 20 per cent to 25 per cent might be expected to show sufficient safety and efficacy to reach the market.
The AMR initiative was approaching completion at the beginning of this year. Then came Covid-19, which turned the attention of the pharma industry and the world’s infectious disease experts to fighting coronavirus rather than bacteria.
Although the pandemic has somewhat delayed the launch of the AMR Action Fund, industry leaders said it injected new urgency into the search for better treatments for infections — bacterial and viral.
“Unlike Covid-19, AMR is a predictable and preventable crisis,” said Thomas Cueni, IFPMA director-general. “We must act together to rebuild the pipeline and ensure that the most promising and innovative antibiotics make it from the lab to patients.”
Foundations and development banks are expected to add further resources to the AMR Action Fund, taking its value above $1bn. Werner Hoyer, president of the European Investment Bank, issued a supportive statement for the launch.
“EIB is actively supporting identified market failures with innovative financial instruments,” said Mr Hoyer. “Antimicrobial resistance is clearly one.”
The fund will be based in Boston, with an additional hub in Europe. It will invest in biotech companies “focused on developing innovative anti-bacterial treatments that address the highest priority public health needs, make a significant difference in clinical practice and save lives.”
The management team and its investors will also provide technical support to portfolio companies, tapping the expertise and resources of the large pharmaceutical companies that have invested in the fund.
The AMR Action Fund will add substantially to the resources deployed by two existing, smaller initiatives that aim to develop new antibiotics — and take the drugs further through clinical trials.
Carb-X, a global non-profit based at Boston University, is investing more than $500m provided by public and philanthropic sources between 2016 and 2021, to take projects into the first stage of clinical testing. Novo Holdings of Denmark launched Repair Impact Fund in 2018 to invest $165m in 20 AMR start-ups, early-stage companies and corporate spinouts.
At the same time the pharmaceutical industry will be lobbying governments to provide the financial incentives needed to pull antibiotics through an expensive development process and on to the market.
Drug companies have left the field over the past 20 years for a number of reasons, including the low price of generic antibiotics, the fact that the drugs are taken only for a short time — and the likelihood that governments will keep any effective new ones that emerge in reserve to treat the most serious infections and prevent resistance emerging through overuse.
Dame Sally Davies, UK special envoy on AMR and former Chief Medical Officer for England, called the new fund “a good start by the pharma industry to make up for their past disinvestment in antibiotics”.
Early premarket gappers
- Gapping up:
- OPTN +22.4%, CDXC +18.9%, APDN +15%, VERI +14.8%, ANAB +14.2%, SAP +6.7%, UMC +5.4%, PTC +4.8%, NKLA +4.2%, CRNX +3.7%, MYL +3.1%, HELE +2.5%, ERI +1.9%, SAR +1.7%, ET +1.7%, HRZN +1.3%, COST +0.8%
- Gapping down:
- OTIC -10.1%, BBBY -8.7%, GLG -6.2%, TPB -3.5%, TPB -3.3%, HQY -3.2%, UAL -2.4%, ALPN -1.6%, ZYME -0.8%
Rolls-Royce warns of significant revenue drop over next 7 years
Aero-engine maker aims for £750m of free cash by 2022 by closing currency hedges
Rolls-Royce pledged to generate £750m of free cash by 2022 even as it signalled significantly lower income from its wide-body engine business over the next seven years as a result of the coronavirus pandemic.
The aero-engine maker said in a trading statement on Thursday that the number of hours its wide-body engines flew — the source of more than half the income of its civil aerospace business — had fallen by 75 per cent in the second quarter.
Warren East, chief executive, said the virus had created a “historic shock in civil aviation which will take several years to recover”.
The group said it would close out a third of its dollar hedges taken to mitigate currency risk, after its cash position was severely hit by the collapse in global aviation as a result of the crisis. Rolls-Royce now expects to see some £4bn in cash flow out of the business this year, £3bn of which would come in the first half. That compares with a promise two years ago to deliver more than £1bn in free cash by the end of 2020.
In May, Rolls-Royce announced plans to cut 9,000 jobs from its 52,000-strong workforce. A voluntary redundancy plan in the UK had already achieved 3,000, most of whom would leave the business this year.
Mr East said he expected wide-body engine flying hours to be down 55 per cent this year, recovering to about 70 per cent of 2019 levels in 2021. But sales of engines — on which Rolls-Royce makes losses — were likely to remain subdued. With US dollar-denominated cash receipts now expected to be substantially lower than the hedged position, Rolls-Royce was closing out $10bn of the $37bn hedges no longer required, resulting in cash costs of about £1.45bn over the next seven years. Shares fell 6 per cent in early trading.
However, the radical restructuring already under way gave the group confidence that it would return to generating positive cash and Rolls-Royce said it expected to deliver £750m within two years. It was on track to deliver £1bn in savings this year.
The group also said its liquidity position had improved after securing a new £2bn five-year term loan, backed by a guarantee from UK Export Finance, which has not yet been drawn. The cash balance was £4.2 billion at the end of June.
>>> Up
* Fortum Raised to Overweight at Barclays; PT 22 euros
* Inditex Raised to Buy at Mirabaud Securities; PT 26 euros (+)
* Sartorius Raised to Hold at Hauck & Aufhaeuser; PT 320 euros (+)
* Verbund Raised to Equal-Weight at Barclays; PT 44 euros
>>> Down
* Aixtron Cut to Hold at M.M. Warburg; PT 11 euros (+)
* Brenntag Cut to Add at Baader Helvea; PT 51 euros (+)
* Compass Cut to Underperform at RBC; PT 1,000 pence
* CropEnergies Cut to Hold at LBBW; PT 10.20 euros
* Engie Cut to Neutral at Citi; PT 12.70 euros
* Husqvarna Cut to Hold at ABG; PT 85 kronor
* Lonza Cut to Hold at MainFirst; PT 540 Swiss francs
* Probi Cut to Hold at SEB Equities; PT 283 kronor
* Uniper Cut to Underweight at Barclays; PT 27.50 euros
* Wartsila Cut to Sell at DNB Markets; PT 6 euros
>>> Initiation
* Amryt Pharma ADRs Rated New Overweight at Cantor; PT $45
* DFV GY Rated New Hold at Bankhaus Metzler; PT 24.20 euros
* Ferrari Rated New Outperform at RBC; PT 200 euros
* JDE PEET'S Rated New Buy at Deutsche Bank; PT 41 euros
* JDE PEET'S Rated New Overweight at JPMorgan; PT 43 euros
* JDE PEET'S Rated New Neutral at Goldman; PT 40 euros
* JDE PEET'S Rated New Neutral at Citi; PT 41 euros (+)
* Michelin Rated New Outperform at RBC; PT 112 euros
* Ninety One Rated New Buy at HSBC; PT 249.70 pence
* Pacifico European Renewables Yieldco Rated New Buy at MainFirst
* Uniper Rated New Reduce at Oddo BHF; PT 24.30 euros
>>> Call
* Barry Callebaut’s Raised Guidance a Sign of Confidence: Vontobel (+)
* Compass Too Expensive Amid Uncertainty, RBC Cuts to Underperform
* Dart Group Well Positioned Following Record Year: Jefferies
* Delivery Hero Is Pick Over Just Eat on Market Share, RBC Says
* Deutsche Post PTs Raised at Berenberg, Citi on 2Q Earnings Jump (+)
* Telefonica Deutschland Cut to Reduce at New Street Research (+)
* DWS, Partners Group Among Top Asset Manager Picks, MS Says
* Ferrari Has Upside From Purosangue SUV, RBC Starts at Outperform
* Hargreaves Lockdown Clients May Prove Less Profitable: Berenberg
* Persimmon Update Shows Progress Made Ahead of Peers, Citi Says (+)
* Rolls-Royce Future ‘Brighter’ on Cash Flow Guidance: Jefferies (+)
* SAP Update Better Than Expected, Guidance Achievable: Jefferies (+)
* Sodexo Remains Expensive, RBC Says, Cutting Forecasts (+)
* Swedbank, SEB Seen Having Good Momentum Ahead of 2Q: MS (+)
- SAP (SAP TH) +3.5%
- SAP Revenue Begins to Recover from Pandemic-Fueled Slowdown
- Prosus (1TY TH) +2.4%
-
Avast (AV2 TH) +1.9%
- Avast PT Raised to 650 pence from 525 pence at Morgan Stanley
- TeamViewer (1UD TH) +1.5%
- ING (INN1 TH) +1.5%
- Orsted (D2G TH) +1.5%
- TUI (TUI1 TH) +1.4%
- Delivery Hero (DHER TH) +1.3%
- Fresenius Medical (FME TH) +1.2%
- Elekta (EJXB TH) +1.1%
- OMV (OMV TH) -0.7%
- TOMRA (TMR TH) -1.4%
- HSBC Holdings (HBC1 TH) -2.8%
- Third day of decline after 3.3% and 2.9% over the past two trading days