REG - Financial RepCouncil - Sanctions against PwC & two former audit partners

Babcock InternationalAnnouncement

08/03/2023 08:15

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RNS Number : 2732S  Financial Reporting Council  08 March 2023

Sanctions against PwC and two former audit partners in respect of the
statutory audit of Babcock International Group plc and a subsidiary

 

 
 
08 March 2023

 

The Financial Reporting Council (FRC) has issued a Final Settlement Decision
Notice
(http://www.frc.org.uk/document-library/enforcement/2023/final-decision-notice-against-pricewaterhousecoope)
(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.

 

 

Notes to editors:

1.  The FRC's purpose is to serve the public interest by setting high
standards of corporate governance, reporting and audit and by holding to
account those responsible for delivering them. The FRC sets the UK Corporate
Governance and Stewardship Codes and UK standards for accounting and actuarial
work; monitors and takes action to promote the quality of corporate reporting;
and operates independent enforcement arrangements for accountants and
actuaries. As the competent authority for audit in the UK the FRC sets
auditing and ethical standards and monitors and enforces audit quality.

2.  Past FRC Enforcement Outcomes
(https://www.frc.org.uk/getattachment/bf5523d7-1329-4b58-8d13-091e8ee7cc74/Enforcement-sanctions-imposed-against-Audit-firms-and-Audit-partners-03-09-2021.pdf)
 can be found here.

3.  To meet its responsibility as the competent authority in respect of audit
enforcement, the FRC operates the Audit Enforcement Procedure
(https://www.frc.org.uk/getattachment/26e687a9-05a1-47bd-861d-497b22678c24/FRC-Audit-Enforcement-Procedure_January-2022.pdf)
. This procedure applies to the investigation and sanctioning of breaches of
the various requirements of the statutory auditors of Public Interest Entities
(PIEs) and any other cases retained by the FRC including AIM companies with a
market capitalisation in excess of €200m. The procedure also applies to
matters that have been reclaimed from a Regulatory Supervisory Body by the
FRC.

Investigations are usually conducted by Executive Counsel and the Enforcement
division. The FRC's Conduct Committee may direct that the investigation is
delegated to a Recognised Supervisory Body (RSB) which will provide an
investigation report to the Executive Counsel so that (s)he may decide whether
to issue a Decision Notice.

All media enquiries should be directed to the FRC communications team:

·      Kate O'Neill, Director of Stakeholder Engagement and Corporate
Affairs, on telephone 07714415229 or email: oneill@frc.org.uk
(mailto:k.oneill@frc.org.uk) .

·      Adam Mohamed, Senior Communications Manager, on telephone
07920874687 or email: mohamed@frc.org.uk (mailto:a.mohamed@frc.org.uk)

 

 

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