PwC faces a fine of about $4.4 million for alleged failings in its audit of British aerospace and defense firm Babcock International Group.
That’s according to a news release and settlement document issued by the United Kingdom’s Financial Reporting Council on Thursday. In the release, the council said that PwC and audit engagement partner John Waters “admitted serious and numerous breaches” of auditing requirements related to cash pooling, financial arrangements for an overseas contract and assessment of goodwill impairment, among other matters.
In the settlement document, Financial Reporting Council officials noted that cash balances and overdrafts were presented in financial statements on a net basis instead of a gross one.
“This was not identified by the Respondents and therefore no audit work was performed to challenge whether such offsetting was permitted under the relevant accounting standard,” the document stated. “No disclosures were made in the Financial Statements in relation to these cash pooling arrangements.”
The council said that PwC and Waters “failed to exercise adequate professional scepticism and to obtain sufficient appropriate audit evidence.”
The document said that many of the breaches occurred in audits of Babcock’s aviation division, which is the company’s smallest. The council said the breaches occurred in audits of consolidated financial statements for Babcock’s 2019 and 2020 fiscal years.
The council suggested that the COVID-19 pandemic may have driven some of the errors, and noted that the alleged breaches by PwC and Waters “were not dishonest, deliberate or reckless and did not occur with a view to financial benefit.”
“With regard to Mr. Waters’ position, he faced severe challenges in discharging his responsibilities as audit engagement partner, including as a consequence of being appointed to the FY2019 Audit at short notice, after the audit had commenced, and not having had the opportunity for any handover from his predecessor,” the council said in the news release. “The COVID-19 pandemic made the FY2020 Audit significantly more difficult.”
The council noted that PwC and Waters displayed an “exceptional level of cooperation,” which led the regulator to reduce the company’s fine from an initial starting point of over $7.4 million. The council also reduced Waters’ fine.
Penrose Foss, the Financial Reporting Council’s executive counsel and executive director of investigations and enforcement, said that the council “acknowledges that the audit engagement partner assumed his role in FY2019 in challenging circumstances.”
“In such circumstances, however, the firm and the audit engagement partner should together have ensured that those challenges were appropriately addressed, and the audit work performed in accordance with applicable standards,” she said.
In a statement, PwC said it is “sorry that some aspects of these audits were not of the standard expected.”
“Audit quality is a constant focus for the firm and the impact of our commitment to continuous improvement has been underlined by recent inspection results,” the Big Four firm said.
PwC is no longer an auditor for Babcock.
The fine against PwC is just the latest example of increasing pressure facing Big Four firms around the world. Australia’s top financial regulator, for instance, has recently said it would review whistleblower complaints involving audit conduct at all four accounting firms, among other sweeping reforms.
