PwC UK ordered to pay fine of £ 5M over audits of London-listed construction groups

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PwC UK ordered to pay fine of £ 5M over audits of London-listed construction groups

Financial Reporting Council (FRC), the UK regulator has ordered penalties to be paid by PwC UK for their failures on accounts of Kier and Galliford Try. PwC’s work was not of the required standard.

PwC UK has been fined twice in a day by Financial Reporting Council (FRC) over audit failures of the two London-listed construction groups.

It was ordered to pay £5 M after Financial Reporting Council (FRC) found problems in both the audits. The companies have been hit by accounting errors in the recent past.

Financial Reporting Council (FRC) found severe problems with PwC’s audit of long-term contracts in these two companies, including recognition of revenue and costs on large contracts at Galliford Try.

The fines are the latest regulatory action over audits in the construction and outsourcing sectors, where accounting treatment of multiyear contracts and validity of assumptions made by company management in preparing the accounts are key issues.

Meticulous audit of long-term contract accounting is very important in construction companies, where many contracts are spread over a number of years. That’s what Claudia Mortimore, Financial Reporting Council (FRC) deputy executive council said.

Auditors must ensure they obtain sufficient appropriate audit evidence to support accounting of the contracts as well as apply sufficient professional scepticism. This is indispensable to allow investors to have confidence in the financial statements.

PwC UK was ordered to pay £ 3M for failing to meet the regulatory requirements in its audit of Galliford Try’s accounts for 2018 and 2019. The penalty was reduced from £ 5.5M in recognition of its co-operation. 

Financial Reporting Council (FRC) said PwC had not done enough to challenge declarations made by Galliford Try’s management, which was found in 2020 to have overstated its assets by £ 94.3M.

A further penalty of almost £ 2M was ordered, reduced from £ 3.35M, for its audit of Kier’s accounts for the year ended June 2017, when it failed to find errors in the company’s income and cash flow statements.

In both the companies - Galliford Try and Kier, PwC had not shown suitable professional scepticism and failed to gather sufficient audit evidence in its audits.

PwC UK agreed to pay more than £ 756,000 to cover the cost of the two FRC investigations.

Jonathan Hook, the partner who led the audits of both companies, was given two fines totalling more than £ 135,000. He retired from PwC UK in 2021. Both Hook and PwC UK were given severe admonishment by FRC.

PwC UK  had invested a lot in improving audit quality, including long-term contracts, since the audits of Kier and Galliford Try.

Financial Reporting Council (FRC) instructed PwC UK to review its audits of listed companies, where long-term contracts are widespread and to report to FRC on the results. PwC received the best score out of the Big Four accounting firms in FRC’s most recent quality inspections.

Financial Reporting Council (FRC) investigations into PwC UK’s audits of Kier and Galliford Try are the latest regulatory actions against auditors of UK-listed contractors.

Deloitte was ordered in April 2022 to pay a fine and costs of more than £ 2M for audit failures at Mitie, while Grant Thornton LLP (US) was fined £ 700,000 in November 2021 for problems with its review of the accounts of Interserve, which became insolvent in 2019 and entered the legal process.

Financial Reporting Council (FRC) is also investigating KPMG UK for signing off the accounts of outsourcer Carillion before it went into liquidation, and mid-tier (read medium sized) firm BDO UK LLP over its auditing of NMCN, a London-listed construction company that went into liquidation in October 2021.

Financial Reporting Council (FRC) in January 2022 was probing PwC’s work at defence contractor Babcock, which has also disclosed accounting errors in recent years.

Financial Reporting Council (FRC) is also reviewing PwC UK's audits in other sectors, with investigations under way into its audits of BT, Eddie Stobart Logistics, collapsed minibond company London Capital and Finance and Wyelands Bank, owned by steel tycoon Sanjeev Gupta. 

To be continued