The Financial Reporting Council has fined PwC £7.5 million ($8.9 million USD) for work related to Babcock, a multinational corporation headquartered in the UK providing, among other things, engineering services. Babcock conducts most of its business with the government, particularly the Ministry of Defence (don’t @ us, that’s how they spell it across the pond).
The FRC identified numerous, serious breaches — which were admitted to by PwC and former engagement partners Nicholas Campbell Lambert and Heather Ancient — including:
- Repeated failures to challenge management and obtain sufficient appropriate evidence, reflecting a general reluctance to challenge management across these parts of the audits; and
- Failure to follow basic audit requirements, evidencing a lack of competence, care or diligence. For example, there was no evidence that the audit team had, whether in FY2018 or before, obtained and read a 30-year Public Private Partnership contract with FY2018 revenue of c.£77m and lifetime revenue of £3bn, and one contract – with an initial value of c.€640m – was written in French, but the audit team neither possessed French language skills nor obtained a translation of the contract.
- For Babcock subsidiary Devonport Royal Dockyard Limited (DRDL), the FRC also discovered a false record of the audit evidence actually obtained in one workpaper relating to a sensitive government contract for FY2018.
The FRC says many of the matters to which the breaches relate were qualitatively material to users of the financial statements. In aggregate, the breaches ran the risk that a material misstatement in the FY2017 and/or FY2018 Babcock group Financial Statements may have gone undetected. In particular, had the auditor appropriately applied the audit standards in FY2018, they should have required clear disclosures in Babcock’s FY2018 Financial Statements explaining the positive impact on operating profit of significant one-off items.
As often happens in the UK, the FRC gave PwC and the partners a break on fines in exchange for admission of naughtiness. PwC has been fined £7,500,000, adjusted for aggravating and mitigating factors and discounted for admissions and early disposal by 25%, so that the financial sanction payable is £5,625,000. Mr Campbell Lambert has been fined £200,000, of which he will pay £150,000. DRDL engagement partner Ms. Ancient was fined £65,000 and will pay £48,750. Everyone involved is required to sign declarations stating, in essence, that they screwed up.
The FRC’s investigation into PwC’s work on the FY2019 and FY2020 Babcock audits is ongoing.
Said FRC Deputy Executive Counsel Claudia Mortimore: “The quality of these audits fell far short of the standards expected of statutory auditors. Of particular concern is the lack of scepticism applied and the failures to follow some basic audit requirements. This robust package of sanctions seeks to deter future breaches and encourage improvement by the firm., in circumstances where PwC has now been sanctioned four times since 2019. The financial sanctions have been reduced by 25% to reflect the admissions made and the settlement reached. PwC conducted effective self-reviews into four of the areas under investigation, and in this respect exhibited exceptional cooperation. However, this has not attracted a further discount to sanctions, as it was countered by examples of errors, omissions and delays in providing material to the investigation, as well as the provision of some unclear or inaccurate responses.”
Full Final Settlement Decision Notice here (PDF)
Sanctions against PwC and two former audit partners [Financial Reporting Council]