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FRC fines PwC, EY for London Capital & Finance audit failings

May 8, 2024

Big Four firms PwC and EY were each penalized by the Financial Reporting Council (FRC) for alleged shortcomings during their respective audits at collapsed investment firm London Capital & Finance (LCF).

Both audit firms were assessed fines of 7 million pounds (U.S. $8.8 million), the FRC announced Tuesday. PwC earned a discount of 30 percent for admissions and early disposal and will pay £4.9 million (U.S. $6.1 million), while EY was awarded the same plus an additional 10 percent off for “exceptional” cooperation down to about £4.4 million (U.S. $5.5 million).

LCF sold £236 million (U.S. $295 million) worth of bonds promising investor returns of 6.5 to 8 percent a year. The investment firm entered administration in January 2019, with more than 11,000 investors suffering significant losses.

The details:

LCF had several years of its finances audited after registering as a public limited company in November 2015.

PwC was the auditor of its full year financial statements for 2016, a period during which LCF was growing rapidly. PwC, along with engagement partner Jessica Miller, was cited by the FRC for failing to properly identify and assess risk of material misstatement; exercise professional skepticism regarding risk of fraud; and audit loan debtors, prepayments, revenue, financial instrument disclosures, going concern, and related party transactions.

Next up was EY auditing the firm’s 2017 financials, a period during which LCF continued to be active in issuing minibonds. EY and engagement partner Neil Parker were cited by the FRC for the same general failures as PwC.

A third firm, Oliver Clive & Co, was fined a reduced £42,000 (U.S. $52,000) related to its audit for one month in 2015.

“In each of these three audits the auditors failed to identify and assess the risks of material misstatement through understanding LCF’s business,” said Jamie Symington, FRC deputy executive counsel, in the regulator’s release. “These breaches are made considerably more serious by the fact that all of the auditors knew they were auditing an expanding business which was engaged in selling unregulated financial products to retail investors and that potential investors might place reliance on the clean audit opinions.”

Compliance considerations:

To earn its additional cooperation credit, EY “proactively carried out its own root cause analysis in respect of the audit failings and provided a copy to executive counsel on an open basis,” the FRC noted.

Firm responses: “We are sorry our work in 2016 did not meet the standards expected and that we expect of ourselves,” said PwC in an emailed statement. “In the eight years since this work took place, we have made significant changes to our audit methodology, policies, and guidance. Audit quality is our top priority, and the results of the changes we have made have been recognized in our annual inspection and supervision reports from the FRC in recent years.”

EY did not immediately respond to a request for comment.

[Compliance Week]

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