PwC will pay a total of nearly 5 million pounds (U.S. $6.2 million) as part of a pair of enforcement actions announced by the U.K. Financial Reporting Council (FRC) regarding deficiencies in the Big Four firm’s audits at construction companies Galliford Try and Kier Group.
The FRC on Tuesday penalized PwC a reduced £3 million (U.S. $3.7 million) for its audit failures at Galliford Try for the fiscal years ended 2018 and 2019 and also announced a reduced sanction of nearly £2 million (U.S. $2.5 million) against the firm for lapses in its FY2017 work at Kier Group. In both cases, PwC made early admissions and cooperated with the regulator, earning it discounts from originally proposed fines of £5.5 million (U.S. $6.9 million) regarding Galliford Try and £3.35 million (U.S. $4.2 million) regarding Kier Group.
The audit firm further received a severe reprimand and must declare its reports did not satisfy relevant requirements in each case. As part of the Kier Group resolution, PwC must report to the FRC on certain audits conducted in 2022-23 featuring long-term contacts and the impact of the remedial actions it has put in place.
Jonathan Hook, a former PwC partner that led engagement on both audits, received reduced penalties of £82,875 (U.S. $104,000) and £52,650 (U.S. $66,000) regarding Galliford Try and Kier Group, respectively.
The details: “The breaches in both decision notices concern failures to properly audit revenue recognized under specific complex long-term contracts,” said FRC Deputy Executive Counsel Claudia Mortimore in the Galliford Try press release.
At Galliford Try, Hook and PwC “did not obtain sufficient appropriate audit evidence, did not sufficiently challenge or corroborate management representations, or adequately determine whether the company had appropriately applied the requirements of the applicable financial reporting framework in relation to” an unspecified contract in both the FY2018 and FY2019 audits, according to the FRC’s decision notice. Four further breaches occurred in relation to the FY2018 audit regarding revenue recognition, audit documentation, the selection and testing of construction contracts, and the testing of controls over aspects of accounting for long-term contracts.
Galliford Try in its FY2020 financial statements restated its FY2018-19 balances, resulting in a £94.3 million (U.S. $118 million) reduction in net assets and retained earnings for FY2018 and a £72.4 million (U.S. $91 million) reduction for FY2019, the FRC stated.
At Kier Group, Hook and PwC similarly failed to obtain sufficient appropriate audit evidence, perform adequate testing on accounting estimates, prepare sufficient audit documentation, and express appropriate professional skepticism, according to the FRC’s decision notice. These deficiencies did not result in misstatement, though Hook and PwC’s failure to “identify and correct errors in the company’s income and cash flow statements relating to the presentation of gains on corporate disposals completed” did. The subsequent restatement in FY2018 did not affect Kier Group’s underlying results.
In both cases, the FRC noted it did not find the breaches to be intentional or dishonest and acknowledged measures PwC has since undertaken to improve the quality of its audit work on long-term contracts.
PwC response: “We are sorry that aspects of our work were not of the required standard,” a firm spokesman said in an emailed statement. “Since these audits were completed, we have invested heavily in an ongoing program to strengthen audit quality, which has included measures to support the audit of long-term contracts. We have seen the positive impact of the actions we’ve taken through improved inspection results and other quality indicators over recent years, and we remain committed to the delivery of consistently high-quality audits.”