The saga surrounding PwC’s controversial audit of IT services company Redcentric has culminated in a £4.5m fine from the FRC.
PwC’s troubles started in February 2017 when the watchdog opened a probe under its audit enforcement procedure following an independent investigation into Redcentric’s accounting practices for the years ended March 2015 and March 2016.
In November of the preceding year, Redcentric announced it had “identified misstated accounting balances” in its P&L accounts after examining results for the half-year ended 30 September. The company placed its CFO on gardening leave and drafted in Deloitte and Nabarro to carry out an independent review.
The review found no evidence of theft, and the misstatements were attributed to profit overstatement over a number of years “with revenues being overstated and costs understated in broadly equal proportions”.
Initial findings from the forensic review led to a £20.8m write-off as net assets and profits previously recorded were deemed to be misstated. Of the £20.8m, £5.9m was from the six months to September 30, 2016, but the rest related to prior periods.
The spotlight then fell on PwC, Redcentric’s erstwhile auditors. The firm had given the all-clear to Redcentric’s financial statements in 2015 and 2016. Now, after investigating the matter, the FRC said PwC failed to “exercise professional scepticism, which is at the heart of auditors’ work”.
There was also harsh criticism reserved for the two PwC audit partners implicated in the matter, stating that Jaskamal Sarai and Arif Ahmad “[evidenced] a serious lack of competence in conducting the statutory audit work”.
Sarai and Ahmad both received fines of £200,000 (discounted to £140,000 for admissions and early resolution) and a severe reprimand. PwC was slapped with a fine of £6.5m (discounted to £4.55m for admissions and early disposal) and a severe reprimand.
As part of the sanction, PwC was forced to strengthen its monitoring and support of the Leeds office audit practice “on terms which have been agreed with the FRC” and give “a declaration that the Statutory Audit Reports did not satisfy the Relevant Requirements.”
In a statement to AccountingWEB, a PwC spokesperson said the firm's work on Redcentric “fell below the professional standards expected of us”. They added, “Since the work in question was completed we have taken numerous steps to strengthen processes.
“We have recently announced an additional £30m investment annually as part of a wide-ranging action plan to provide greater focus on the quality and public interest responsibilities of PwC’s statutory audit services.”
AccountingWEB recently covered PwC’s announced £30m revamp of its scandal-struck audit arm. The plan includes a split of its audit practice into external and internal auditing teams and the hiring of 500 additional auditors.
PwC said it will double the amount of training its auditors receive annually and it will expand its audit quality control team by two-thirds.
Karthik Ramanna, professor of business at the University of Oxford’s Blavatnik School of Government will also school its PwC staff on “what a culture of challenge means for auditors in 2019”.
Reacting to the announcement at the time, Robert Stell, director of Rise Audit, called the measures 'weird'.
“It’s obvious the Big Four are motivated to do something to stop it being forced upon them," said Stell. "But they’ve got to change the culture and that’s a real root and branch operation.”
About Francois Badenhorst
I'm AccountingWEB's business editor. Feel free to get in touch with comments, tips, scoops or irreverent banter.