The U.K. Financial Reporting Council (FRC) fined Big Four firm PwC more than 5.6 million pounds (U.S. $6.6 million) for failing to challenge management, obtain sufficient evidence, and follow basic requirements while conducting audits of a British defense contractor and its subsidiary.
The FRC’s final settlement notice, made public Wednesday but issued Jan. 3, also fined two former PwC audit partners for their work at Babcock International Group for the fiscal years ended 2017 and 2018 and Babcock subsidiary Devonport Royal Dockyard for FY2018.
The details: The FRC said its investigation of the audits of Babcock and Devonport found “numerous, serious breaches” of U.K. auditing standards. Deficiencies included “repeated failures to challenge management and obtain sufficient appropriate evidence” and “failure to follow basic audit requirements, evidencing a lack of competence, care, or diligence,” the regulator said in a press release.
PwC audit engagement partner Nicholas Campbell Lambert was fined £150,000 (U.S. $177,000) for deficiencies in auditing Babcock, and audit engagement partner Heather Ancient was fined £48,750 (U.S. $58,000) for deficiencies with the Devonport audit.
PwC and the partners admitted the breaches, according to the FRC. Each of their penalties were reduced 25 percent as a result.
Compliance ramifications: The FRC severely reprimanded PwC, Campbell Lambert, and Ancient, in addition to requiring a declaration the audits did not satisfy U.K audit reporting requirements.
The PwC auditors failed to read and understand the provisions of several important public/private partnership contracts, including one 30-year contract with a lifetime revenue of £3 billion (U.S. $3.5 billion) and another written in French, that were material to the audit, according to the settlement.
The settlement noted the FY2017 and FY2018 audits have not been restated.
“However, the audit teams’ repeated lack of challenge and failures to obtain audit evidence in respect of the areas where breaches have been identified may have created a risk that a material misstatement went undetected and accordingly may have influenced the economic decisions of users of the financial statement,” the FRC said.
The regulator said PwC conducted effective self-reviews in four areas that gave rise to the breaches, but the firm’s cooperation was “countered by some important examples of errors, omissions, and delays in providing material subject to our investigation notices and the provision of unclear, or inaccurate responses.”
PwC remains under investigation regarding its FY2019 and FY2020 audits of Babcock.
PwC response: “We’re sorry that the work in question was not of the standard required and that we demand of ourselves,” the firm said in an emailed statement. “In the years since, we have made significant and continuous investment in strengthening audit quality, which has been borne out through improved inspection results. We are focused on ensuring the consistent delivery of high-quality audits.”
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