UK: Sanctions against PwC and two former audit partners
March 8, 2023
The Financial Reporting Council (FRC) has issued a Final Settlement Decision Notice (FSDN) under the Audit Enforcement Procedure and imposed sanctions against PwC and two former audit partners (the Respondents), relating to the statutory audits of: (i) Babcock International Group plc (Babcock) for the financial years ended 31 March 2017 (FY2017) and 31 March 2018 (FY2018); and (ii) Devonport Royal Dockyard Limited (DRDL) (a subsidiary of Babcock) for FY2018. Nicholas Campbell Lambert was the audit engagement partner for Babcock, and Heather Ancient was the audit engagement partner for DRDL.
Babcock is a multinational corporation headquartered in the UK providing, among other things, engineering services. Its main business is with public bodies, particularly the UK’s Ministry of Defence. A number of its contracts are highly sensitive UK government contracts and its work therefore attracts significant public interest in the UK.
The FRC investigation concerned a number of areas of the audits, including seven long-term contracts, comprising approximately 25% of the FY2018 Babcock group revenue.
Numerous, serious breaches were admitted by the Respondents. Breaches were identified in respect of every area of audit investigated and included:
- repeated failures to challenge management and obtain sufficient appropriate evidence, reflecting a general reluctance to challenge management across these parts of the audits; and
- examples of a failure to follow basic audit requirements, evidencing a lack of competence, care or diligence. For example, there was no evidence that the audit team had, whether in FY2018 or before, obtained and read a 30-year Public Private Partnership contract with FY2018 revenue of c.£77m and lifetime revenue of £3bn, and one contract - with an initial value of c.€640m - was written in French, but the audit team neither possessed French language skills nor obtained a translation of the contract.
Many of the matters to which the breaches relate were qualitatively material to users of the financial statements. In aggregate, the breaches ran the risk that a material misstatement in the FY2017 and / or FY2018 Babcock group Financial Statements may have gone undetected. In particular, had the auditor appropriately applied the audit standards in FY2018, they should have required clear disclosures in Babcock’s FY2018 Financial Statements explaining the positive impact on operating profit of significant one-off items.
A lack of independence was identified in respect of the inappropriate provision of accounting advice by the PwC group audit team to Babcock and, in respect of the DRDL FY2018 component audit, one audit workpaper relating to a sensitive government contract created a false record of the audit evidence actually obtained.
PwC has been fined £7,500,000, adjusted for aggravating and mitigating factors and discounted for admissions and early disposal by 25%, so that the financial sanction payable is £5,625,000 and has agreed Non-Financial Sanctions comprising:
- A Severe Reprimand.
- An Order requiring review and amendment of certain PwC training programmes.
- A Declaration that the audit reports signed on behalf of PwC did not satisfy the Audit reporting requirements, as set out in the Final Settlement Decision Notice.
Mr Campbell Lambert has been fined £200,000, adjusted for aggravating and mitigating factors and discounted for admissions and early disposal by 25%, so that the financial sanction payable is £150,000 and has agreed Non-Financial Sanctions comprising:
- A Severe Reprimand.
- A Declaration that the FY2017 and FY2018 Babcock group audit reports signed by Mr Campbell Lambert did not satisfy the Audit reporting requirements, as set out in the Final Settlement Decision Notice.
Ms Ancient has been fined £65,000, adjusted for aggravating and mitigating factors and discounted for admissions and early disposal by 25%, so that the financial sanction payable is £48,750 and has agreed Non-Financial Sanctions comprising:
- A Severe Reprimand.
- A Declaration that the FY2018 DRDL audit report signed by Ms Ancient did not satisfy the Audit reporting requirements, as set out in the Final Settlement Decision Notice.
PwC has also been required to pay the costs of the investigation.
Claudia Mortimore, Deputy Executive Counsel, 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. The financial sanctions have been reduced by 25% to reflect the admissions made and the settlement reached. PwC conducted effective self-reviews into four of the areas under investigation, and in this respect exhibited exceptional cooperation. However, this has not attracted a further discount to sanctions, as it was countered by examples of errors, omissions and delays in providing material to the investigation, as well as the provision of some unclear or inaccurate responses."
The FRC’s investigation into PwC’s statutory audits of the FY2019 and FY2020 Babcock group financial statements is ongoing.
[Financial Reporting Council, UK]