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FRC probes PwC over Redcentric audit

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28th Feb 2017
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In a day to forget for PwC, the Financial Reporting Council (FRC) has started an investigation into the Big Four firm’s audit of the financial statements for IT managed services provider Redcentric, after an investigation revealed a £20m misstatement.

The FRC revealed that it has started 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 Harrogate-based Redcentric announced that it had “identified misstated accounting balances” in its P&L accounts when examining results for the half-year ended 30 September, and had commissioned Deloitte and Nabarro to carry out an independent review.

The investigation resulted in the restatement of the AIM-listed company’s consolidated financial statements and other financial information relating to those years.

Following Redcentric’s announcement CFO Tim Coleman was placed on gardening leave “with immediate effect”, and more than 92 pence (around 62%) was wiped off the business’s share price.

Deloitte and Nabarro’s 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”.

The 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 report stated that the company’s net debt position for both 31 March 2016 and 30 September 2016 was materially higher than originally reported. As of 31 March 2016, net debt was £37.8m, and on 30 September 2016 net debt was £34.4m.

“However”, continued the statement, “the net debt position as at the period ends mentioned above are not representative because creditors had been significantly stretched at those dates. The average month end net debt position over the past eight months to 30 November 2016 was £42.0m.”

The company has announced a ‘remedial plan of action’, including the appointment of new CFO, Peter Brotherton, improvements to the company's finance function, internal policies and procedures, more robust internal controls around cash reconciliations, and improvements to billing and credit control management systems and processes.

Redcentric also stated that it will replace its multiple legacy back office systems with a standard integrated Microsoft platform, which will roll out over the first half of 2017.

Redcentric customers have included the NHS trusts, the MoD and several local councils.

The FRC said that its investigation will consider, but will not be restricted to, issues regarding misstated accounting balances. In a statement a PwC spokesperson said: “We will co-operate fully with the FRC in its enquiries.”

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By thegreatgrumbleduke
28th Feb 2017 12:45

Its a dance as old as time. Window dress the period end balances and push the share price higher. Not illegal but would be slow to back any management team caught doing this to this extent.

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By Trethi Teg
28th Feb 2017 14:44

Yet again PWC (or could be KMPG, E&Y - all the same really) sign a report which of little value. FRC investigation and a slap on the wrist. World moves on. PWC and others continue to monopolise. Happy partners pocket millions.

Until all partners jointly and severably liable for losses caused by screwed up audits they wont give a toss.

ICAEW pontificate but do nothing.

La La Land - oops sorry - shouldn't have mentioned that!

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