PwC has been fined £5.6mn by the UK accounting regulator for failings in its audits of defence group Babcock International, the latest in a string of penalties for the Big Four firm.
The Financial Reporting Council said on Wednesday it had found serious breaches of audit requirements by PwC over its work on the accounts for the 2017 and 2018 financial years, including repeated failures to challenge Babcock’s management.
PwC, whose partners received a record average profit share of more than £1mn each last year, has been fined over its audits of four UK listed companies in the past year.
It was fined twice in one day last June when it was ordered to pay £5mn for failings at construction and outsourcing companies Kier and Galliford Try. It was also ordered to pay £1.75mn for problems in its auditing of telecoms group BT.
The Babcock investigation covered a number of areas of the audits, including seven long-term contracts that made up about a quarter of Babcock’s revenue in the financial year ended March 2018. The breaches created a risk that a material misstatement in the accounts could have gone undetected, the FRC said.
The regulator said it had found “a failure to follow basic audit requirements, evidencing a lack of competence, care or diligence”. In one example, the FRC found no evidence that auditors read a public-private partnership contract with revenue of £3bn over 30 years, including about £77mn in the 2018 financial year.
Another €640mn contract was written in French but was never translated into English even though the audit team did not speak French, the FRC said.
The regulator also identified a “lack of independence” by PwC because the audit team gave accounting advice to Babcock, which was “inappropriate”. Auditors are restricted from advising large audit clients to protect their independence.
The sanctions against PwC are the latest fallout from a number of accounting problems at Babcock, one of the UK’s biggest defence contractors whose main business is with public bodies, including highly sensitive contracts with the UK’s Ministry of Defence.
In April 2021, following a change of management, Babcock announced about 140 adjustments to its accounts totalling about £2bn as a result of previous errors, changes in estimates and an updated accounting policy. The group’s accounting had been under scrutiny since 2018 when Boatman Capital Research published a list of criticisms of the company, which Babcock at the time labelled “false and malicious”.
Two of PwC’s former audit partners were also reprimanded by the FRC. Nicholas Campbell Lambert, who led the Babcock audit, was fined £150,000, while Heather Ancient, who headed the audit of a Babcock subsidiary, was ordered to pay £48,750.
PwC’s fine was reduced from £7.5mn to reflect its decision to settle the case. The former partners’ fines were discounted from £200,000 and £65,000 respectively. Campbell Lambert is now a partner at Deloitte in Australia.
PwC was also ordered to pay costs of £733,000 to the FRC and to review its training programmes.
The FRC was particularly concerned by PwC’s “lack of scepticism” and “failures to follow some basic audit requirements”, said Claudia Mortimore, FRC deputy executive counsel. While the firm had conducted “effective” reviews of the areas investigated and co-operated with the regulator, there had also been errors, omissions and delays in providing material to the FRC and some of PwC’s responses were inaccurate, she said.
The FRC is still investigating PwC’s audits of the accounts for the 2019 and 2020 financial years. It is also probing the firm’s signing off of accounts of Intu, Wyelands Bank, London Capital & Finance and Eddie Stobart Logistics.
“We’re sorry that the work in question was not of the standard required and that we demand of ourselves,” said PwC, adding that it had invested significantly in improving its audits and had received improved results in FRC inspections. “We are focused on ensuring the consistent delivery of high quality audits,” it said.
Babcock declined to comment.