Save content
Have you found this content useful? Use the button above to save it to your profile.
PwC hit with another £1.75m, plus £665,000 costs in BT Italy audit investigation
iStock_CreativaImages_Penalty fine

PwC fined £1.75m for BT fraud audit failings

by

PwC started the week with another Big Four audit reprimand, adding £1.75m to the penalty pot for its failure to identify fraudulent statements in BT’s 2017 accounts.

8th Aug 2022
Save content
Have you found this content useful? Use the button above to save it to your profile.

As the auditor responsible for reviewing BT’s 2017 financial statements, PwC and its audit engagement partner Richard Hughes accepted a Financial Reporting Council (FRC) ruling that their work failed to meet regulatory requirements.

PwC was initially assessed for a £2.5m fine and Hughes £60,000. The FRC reduced the penalties by 30% to £1.75 and £42,000 respectively for “admissions and early disposal”. However, they are also on the hook for £665,000 of the FRC’s costs for pursuing the case.

According to his LinkedIn page, Hughes retired from the firm last month.

Managers fudged bonus targets

The BT fraud saga originated in the UK telecom giant’s Italian subsidiary and came to light in a whistleblowing report emailed anonymously to the company in July 2016. Senior BT Italy executives were alleged to have fabricated transactions to conceal the subsidiary’s true financial position to protect their bonuses. Local prosecutors alleged that the PwC partner leading the audit in Italy had also falsified findings.

BT appointed an unnamed accounting firm to investigate the irregularities and this external team found a serious breakdown of processes and controls at BT Italy amounting to fraud. BT initially announced accounting adjustments of £530m in July 2017, which prompted a 20% drop in its share price in one day.

In the subsequent annual report published in May 2017, BT disclosed £268m worth of “prior-period errors” and £245m of “changes in accounting estimates”, bringing the total impact of the BT Italy accounting irregularities to £513m.

Not sceptical enough

The regulator identified the most serious breaches of professional conduct in relation to two receivables balance adjustments worth £72m, which the auditor failed to approach with the necessary professional scepticism.

Members of the PwC audit engagement team raised questions about these debt adjustments internally, but PwC ultimately concurred with management assessments that these errors had not been material in prior periods. As a result, the adjustments could be reported as revisions, rather than restatements.

Since the adjustments were close to the materiality thresholds in previous years and were very large for an entity of BT Italy’s size, “the respondents should… have adopted an attitude of heightened scepticism in its approach to auditing whether the amount of the prior period errors... was correct,” the FRC decision note concluded.

Documentary failings

While fitting into the broader documentary failings in PwC’s work on the BT Italy adjustments, the debt adjustments were less than overall materiality and the overall amount of the adjustments were not ruled to be incorrect.

“It is not suggested that the breaches were intentional, dishonest, deliberate or reckless,” deputy executive counsel Claudia Mortimore wrote. “The audit fee for the engagement was £4.3m. The respondents did not derive or intend to derive any specific financial benefit from the breaches.”

The final notice summarising the BT Italy findings catalogued four previous sanctions imposed on PwC going back to 2018. PwC, which tops the UK charts for audit fee income, still lags behind KPMG’s table-topping sanction total of £20m last year (and already nearing £18m this year). PwC’s latest penalty takes its total penalties up to nearly £7m after findings in the Galliford Try and Kier cases in April.

Replies (18)

Please login or register to join the discussion.

avatar
By Paul Crowley
08th Aug 2022 18:17

'BT Italy executives were alleged to have fabricated transactions to conceal the subsidiary’s true financial position to protect their bonuses. Local prosecutors alleged that the PwC partner leading the audit in Italy had also falsified findings.'
Why would the PWC Partner falsify findings, just to create false fictional bonuses for the locals?
I can think of a reason that makes cheating in ethics exams seem quite trivial

Is it time for proper penalties?

Thanks (3)
Replying to Paul Crowley:
avatar
By Hugo Fair
08th Aug 2022 20:28

Quite. And who is deputy executive counsel Claudia Mortimore?

i.e. what was her role when she said “It is not suggested that the breaches were intentional, dishonest, deliberate or reckless. The audit fee for the engagement was £4.3m. The respondents did not derive or intend to derive any specific financial benefit from the breaches.”

If the breaches were none of those things then what were they (honest mistakes)?

Thanks (4)
avatar
By JustAnotherUser
09th Aug 2022 09:07

The 'fraud' saga.... "wrongful or criminal deception intended to result in financial or personal gain"

If this is fraud / a crime, why are there no proceedings other than a fine and early retirement?

The audit fee for the engagement was £4.3 million.. fine of 1.75 million + 665k cost = 2.412 m a much better percentage than usual

Thanks (3)
Replying to JustAnotherUser:
John Stokdyk, AccountingWEB head of insight
By John Stokdyk
11th Aug 2022 13:17

For the sake of completeness, there is an Italian criminal prosecution underway, in which the PwC audit partner was implicated. Some of the evidence may have helped the FRC build its case, but did not implicate PwC in criminal activity, as the FRC was keen to point out.
The BT Italy chief operating officer Stefania Truzzoli was initially convicted on false accounting charges and sentenced to a year in prison, but was acquitted on appeal in February 2022: https://www.reuters.com/business/media-telecom/appeal-court-acquits-form...

There is an ongoing trial for 20 other executives, including former BT Global Services chief financial officer Richard Cameron - but no sign of any news on its progress. All the defendants deny the charges.

Elsewhere, BT defeated a class action suit brought by a shareholder in the US claiming the company had committed securities fraud. Report here: https://www.davispolk.com/experience/complete-victory-bt-group-securitie...

Thanks (0)
VAT
By Jason Croke
09th Aug 2022 15:32

I guess the message is if you want to defraud your bosses and claim a bonus you are not entitled to, just make spurious adjustments and as long as it is under the materiality thresholds, the auditors will ignore it.

But as JustAnotherUser has noted, the fine is less than the original fee charged to BT, such penalties are in no way going to change behaviour.

Thanks (2)
Replying to Jason Croke:
avatar
By Red1960
10th Aug 2022 11:27

Quite, they condone and encourage it as the regularity of such fines affecting the firms representing the "cream" of the profession confirms.

Of course we are only seeing those rare occasions where the offenders get caught and have to assume the cases where they get away with it are more numerous.

Thanks (0)
avatar
By JustAnotherUser
10th Aug 2022 08:56

I also enjoy the part where the fines have a 'discount' ... defined as 'a deduction from the usual cost of something.

Nothing should be usual about this, and the word discount is embarrassing to be linked to a fine surrounding fraud.

New Fraud offer from the FRC, you fraud one, you get one free! Limited time 2 fines for the price of one, check out all the offers in this months fraud gazette. Members only!

Thanks (5)
avatar
By TB93
10th Aug 2022 09:31

These days I'm beginning to wonder whether audits are worth the paper that they're written on.

Thanks (2)
Replying to TB93:
avatar
By Tax bot
10th Aug 2022 12:54

I've though this every since I qualified with one of the big four.

Thanks (0)
avatar
By jon watkin
10th Aug 2022 10:19

Same old, same old, another week another fine. Insufficient professional scepticism yet again and over-reliance on materiality to drive the decision to ignore/overlook a major fraud in an overseas subsidiary. The fee driving the decision perhaps? 'Be reet' as we say in Yorkshire but sometimes it's just not good enough. There was a time when these firms were held up as paragons of professional excellence and integrity.

Thanks (0)
avatar
By petestar1969
10th Aug 2022 11:48

Doesn't surprise me and the fine is not big enough to act as a deterrent.

I used to work at an accountancy firm that trained up people who then left and often went to the big firms, like PwC or KPMG.

I remember one particular cocky little sod who got very upset when my fellow manager told him he needed to more work on a job to sort out a difference. He kept saying "but the difference is less than materiality, so why does it matter? Can't we just leave it?"

We went to work for a big firm and I suspect kept the same mindset.......

Thanks (0)
avatar
By anthonystorey
10th Aug 2022 11:48

Does it never end with these big firms.

Thanks (0)
Stuart Walker Yellow Tomato Copy
By winton50
10th Aug 2022 11:59

The final paragraph sums the situation up nicely for me.

The big boys aren't hurting enough from these sanctions and frankly they have enough people that they can always find a fall guy to take early retirement or be moved to another role.

Until people start going to prison for what amounts to a fraud on the shareholders and the public at large nothing will change.

Thanks (0)
avatar
By Arbitrary
10th Aug 2022 12:50

And this £1.75m fine ends up in the ICAEW bank account? There has already been discussion of this curiosity on Aweb, but it should be borne in mind every time a significant FCA fine happens. Does anyone know if the ICAEW has published anything about its intentions for the enormous sums receivable by it in the last year?

Thanks (0)
Replying to Arbitrary:
avatar
By Paul Crowley
10th Aug 2022 13:34

Proportionality is the problem
Fine for big boys? Less than half on one single fee
Fine for small practitioner recently? Nearly half of one complete year's income
Any client lost any money or got the tax wrong for the small guy? No but the AML was not good

Thanks (1)
avatar
By lisa65
10th Aug 2022 14:25

A fine of £1.75m (after 30% discount) for failure to “adopt an attitude of heightened scepticism in PwC's approach to auditing” is small change compared to a fine of £15 million (US$19.4 million) that was imposed on Deloitte in September 2020 for failure to “act with professional skepticism” (American spelling).

I am not persuaded that such a low fine “will serve as a timely reminder to the profession”, as deputy executive counsel Claudia Mortimore noted. How was the fine of 1.7m calculated? Is it high enough to act as deterrent?

The audit fee for the engagement was £4.3m. If you deduct the 1.7m fine plus £665,000 FRC’s costs for pursuing the case, you are left with a healthy profit of £1,885m. So, if you continue to act with insufficient professional scepticism in subsequent engagements and get fined, you will still make a healthy profit. Why bother with "sufficient scepticism"?

To act as deterrent, the fine plus FRC’s costs for pursing the case should be set at a level where it wipes off all the profit on the engagement. Using this formula, I have calculated that it should be £3,635m.

Thanks (0)
avatar
By C J EYRE
10th Aug 2022 16:57

I smile every time the big boys get fined
Having work as a self employed Accountant for over 40 years, unfortunately none qualified, I find it hard at times to be allowed to submit certificates of profits/income for my sole trader clients to banks, building societies etc., but they will accept any thing from the big boys.
One day they will realize their mistake.

Thanks (0)
avatar
By paul.benny
10th Aug 2022 17:50

What happened to the doctrine of bloodhound not watchdog?
Who committed the fraud? Local management
Who has primary responsibility for having a system of internal controls to prevent and detect fraud? The directors
Is there an internal audit function that (presumably) also did not detect the fraud?

Amongst all this schadenfruede, it's perhaps not as simple as being down to bad work by PwC.

Thanks (0)