The accounting regulator has fined PwC £5.6m and sanctioned two of the firm’s former partners over “serious breaches” during its audits of defence giant Babcock.
The Financial Reporting Council (FRC) said on Wednesday (March 8) its investigation concerned audits of Babcock’s 2017 and 2018 financial years, and for its Plymouth-based subsidiary Devonport Royal Dockyard Limited (DRDL) for FY2018.
The FRC said these included seven long-term contracts, comprising around a quarter of Babcock’s group revenue in 2018.
The regulator said Nicholas Campbell Lambert, who is no longer with PwC, was the audit engagement partner for Babcock, and Heather Ancient, a retired former leader of PwC’s Plymouth office, was the audit engagement partner for DRDL.
The FRC said “numerous” breaches during the audits had been admitted, including “repeated failures” to challenge Babcock’s management and obtain “sufficient appropriate evidence”. It added that basic audit requirements had not been followed, “evidencing a lack of competence, care or diligence”.
Mr Lambert and Ms Ancient were both given severe reprimands, with Mr Lambert fined £150,000 and Ms Ancient £48,750.
Claudia Mortimore, deputy executive counsel at the FRC, said the financial sanctions had been reduced by 25%, to reflect the admissions made and the settlement reached.
Ms Mortimore said: “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.”
In a statement PwC said: “We’re sorry that the work in question was not of the standard required and that we demand of ourselves.
“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."
Babcock told BusinessLive it was not a party to the FRC investigation and said "it would be inappropriate to comment" directly on the announcement.
The firm added its chief executive David Lockwood had begun "a comprehensive review" in 2021 of its current and historic contract and balance sheet, covering more than 100 contracts representing around £2.7bn of annual revenues. Babcock said this included items covered by the FRC investigation.
A spokesperson for Babcock added: "The contract profitability and balance sheet review reported initial results to the market in April 2021, with full details of the resulting c£2.0bn largely one-off, non-cash write-off subsequently included in its FY21 full year results presentation. Around half of the write-off related to goodwill from previous acquisitions. This established an appropriate baseline for the financial performance of the group.
"Since then, Babcock has continued to progress its turnaround strategy, which includes ensuring a suitably prudent approach to financial judgements."
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