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PwC fined £5m for audits of construction companies

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PwC has been hit with two fines, collectively worth over £5m, for the audits of construction companies Kier and Galliford Try. 

7th Jun 2022
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Britain’s accounting regulator announced this morning two separate sanctions for PwC and audit engagement partner Jonathan Hook. 

Not only did the Financial Reporting Council (FRC) severely reprimand the Big Four firm and Hook for each separate audit failure, but both also came with big fines. The biggest sanction of the two was the audit of Galliford Try, which carried a £5.5m fine (later reduced to £3,038,750 due to admissions and early disposal). The sanction attached to the audit of Kier initially cost the Big Four firm £3.35m, but due to mitigating factors the penalty was adjusted to £1.9m. 

Hook was also ordered to pay fines of £90,000 for the Kier audit (reduced to £52,650) and £150,000 (adjusted to £82,875). Prior to these sanctions, the regulator described Hook as having an “unblemished disciplinary record” and over 30 years of auditing experience. 

Both audit failures happened not long after each other. The Galliford Try sanction related to the company’s 2018 year end and 2019 financial year end. Meanwhile, the Kier fine was for the financial year ended 30 June 2017.

Vital for rigorous auditing

“Rigorous auditing of long-term contract accounting is particularly important in the audit of construction companies, where many contracts are spread over a number of years. Auditors must not only ensure that they obtain sufficient appropriate audit evidence to support the accounting of the contracts, but also apply sufficient professional scepticism. This is vital so that investors can have confidence in the financial statements,” said Claudia Mortimore, the FRC’s deputy executive counsel. 

Mortimer added that PwC has introduced initiatives to improve the quality of audit work and the non-financial sanctions require the firm to review long-term contract audit work in subsequent audit engagements.

Kier sanction

The breaches in the Kier sanction centred on the audit of long-term contracts, which accounted for the majority of the company’s construction division. The FRC said that although the auditors identified contract accounting as a significant risk during the planning of the audit, PwC didn’t act on this during the audit. 

The shortcomings listed by the regulator included failing to obtain sufficient audit evidence, inadequate testing, failing to prepare sufficient audit documentation to support conclusions reached, and failing to carry out the audit with sufficient professional scepticism.

While this did not cause the 2017 financial statements to be misstated, a separate failure to identify and correct errors in the company’s income and cashflow statements did. This error related to the presentation of gains on corporate disposals completed in the 2017 financial year.

PwC’s total audit fee for the FY2017 audit was £1.3m.

Galliford Try sanction

The larger of the two fines was for the audits of Galliford Try. The construction company had a significant number of public-sector clients and some contracts in excess of £100m. The FRC said that there was “obvious public interest in the proper audit”. 

Like the Kier audit, construction contracts were identified as a significant risk. The 2019 financial year audit also brought the additional risk that the recognition of material variations and claims on contracts may not be appropriate. 

PwC and Hook were pulled up for breaches in the FY2018 and FY2019 audits for a lack of professional scepticism, the insufficient challenge of management’s assertions, the appropriateness of audit evidence obtained and the extent of documentation included in the audit file. 

Galliford Try had to restate the prior year balances and as a result of this, the company saw a 22% reduction in the reported profit before tax and a 12% reduction in net assets for FY2018.

The FRC revealed that the total audit fee for the parent company for the FY2018 and FY2019 audits was £400,000.

PwC’s history of fines

Today’s fines add to the other four fines PwC has received from the regulator since 2017. Taking into account the Kier and Galliford Try fines, the fines against PwC total over £30m.  

  • In April 2017, PwC was severely reprimanded and fined £5m over the audit of Connaught
  • The firm was sanctioned with a further £6m fine a couple of months later for the audit of RSM Tenon – this fine was reduced to £5.1m on settlement. 
  • The next sanction came a year later in May 2018 when PwC was ordered to pay a then-record £10m fine (later reduced to £6.5m) for the audit of Taveta/BHS. 
  • Then one year later in May 2019, the firm was hit with a £6.5m fine (later reduced to £4.55m) for the audit of Redcentric

Commenting on today’s two fines, a PwC spokesperson said, “We are sorry that aspects of our work were not of the required standard. Since these audits were completed we have invested heavily in an ongoing programme to strengthen audit quality, which has included measures to support the audit of long-term contracts. We have seen the positive impact of the actions we’ve taken through improved inspection results and other quality indicators over recent years, and we remain committed to the delivery of consistently high-quality audits.”

Record fines

The Big Four firms have frequently featured in the headlines for their record fines. KPMG was the last Big Four firm to face a punishment from the regulator over the audit of Rolls-Royce and the £14m fine for the audit of Carillion.

As a consequence due to the accountancy scheme, the Institute of Chartered Accountants in England and Wales (ICAEW) had also been pulled into the controversy. The professional body had kept over £50m in fines from the recent Big Four scandals. However, ICAEW said this morning that: “Both of these FRC investigations have been conducted under the Audit Enforcement Procedure (AEP), so the fines money goes to HM Treasury.”

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Replies (13)

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By Hugo Fair
07th Jun 2022 19:38

Is it time for Aweb to acknowledge the scale and frequency of these audit failures by the big 4 ... by replacing all these articles with a single regular page that gets updated every fortnight?

Something like "Fines of the week ... running total this year now reaches £xxxxxxx"!

Oh and can we omit repeating 'the spokesperson said' section, please?
“Since these audits were completed we have invested heavily (yawn / scratch / zzzzz)"!

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Replying to Hugo Fair:
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By Paul Crowley
07th Jun 2022 20:28

Brilliant idea
It would be like following football league tables

Noted that Justin was first to put a link in for this report on a comment on yet another audit failure article

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Replying to Paul Crowley:
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By Justin Bryant
08th Jun 2022 09:56

Yes; perhaps I should be paid for my A1 Aweb services (newspapers aside, Aweb is pretty good I find at being first amongst its competitors with such news)!

If these auditors treated audits as they do their DD jobs i.e. impressing their paying client to find as many big problems as possible (to reduce the target's price in the case of DD, so they can justify their huge DD fee), then all would be pretty much fine I expect in the audit world. But of course the incentives are all revered and back to front for that to happen for audits. Hence these audit problems will forever continue unless & until those basic dysfunctional incentives are fixed.

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By meadowsaw227
08th Jun 2022 10:39

Just out of interest what actually happens to all the fines ? .

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Replying to meadowsaw227:
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By Hugo Fair
08th Jun 2022 10:45

See final paragraph of article ... including link to https://www.accountingweb.co.uk/practice/general-practice/icaew-banks-kp...

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Replying to meadowsaw227:
paddle steamer
By DJKL
08th Jun 2022 16:58

A very inebriated office Christmas party

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By colinstewart
08th Jun 2022 10:44

Can someone explain 'The Accountancy Scheme"? I don't understand how the ICEAW ends up with some/all of the penalties levied by the FRC.
Also, who is getting close up and personal with the individuals at fault and withdrawing their Practicing Certificates/Excluding them from membership etc?

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Replying to colinstewart:
By Michael Beaver
08th Jun 2022 11:02

From my understanding the FRC investigations are resourced and funded by the ICAEW so the fines are supposed to reimburse them for those costs, given that many investigations don't lead to any fines at all. The scheme clearly didn't anticipate such big fines!

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Replying to michaelbeaver:
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By Hugo Fair
08th Jun 2022 11:34

Only partially accurate ... see https://www.frc.org.uk/about-the-frc/funding

"The accountancy profession’s contribution to the FRC’s annual funding requirement is paid by the Consultative Committee of Accountancy Bodies (CCAB), whose members are ACCA, CAI, CIPFA, ICAEW, and ICAS; and by CIMA which contributes to the FRC’s funding requirement under the terms of a separate agreement with the FRC" ... and it gets more complicated (of course)!

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By ASF
08th Jun 2022 11:33

Yet again, audit of Construction companies features. Having spent most of my career in E&C companies, there is no doubt the whole arena of contract accounting and forecasting is messy and complex - and not just for auditors. Accountants and management alike in the companies can find the rules challenging at times, and in the forecasting side a great deal of judgement is often needed - particularly with regard to changes and claims. Management override can often be a real challenge, starting down at the project level and extending all the way up to the boardroom. But we know that, and so internal control and audit processes need to be designed, operated and tested to control this, and why a SOX-type piece of legislation should have been introduced recently to force the business world to deal with such matters in a more effective and restrictive manner.

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By vstrad
08th Jun 2022 11:35

Do any of these flawed audits ever result in the subject company's financial situation appearing worse than it really is? Just askin'.

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By tedbuck
08th Jun 2022 11:38

Interesting project - the weekly report but underneath all this there is an undercurrent which I wonder about.
It seems to me that fines are the new form of taxation - Audit fines, GDPR fines, VAT fines, MTDfITSA fines and so on - I am sure you can easily think of more. And it's moving onto the roads with more powers to fine being handed out to local authorities etc. Not a trend I'm very comfortable with.
As for the thought of the incompetent FCR sitting in judgement on the big 4 - well I have to say even I, the biggest cynic where the big 4 are concerned, have to wonder if the criticism comes from those who think the job is much easier than it really is. I mean can you imagine the FCR carrying out an audit? I shouldn't think they would know where to start.

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By JustAnotherUser
08th Jun 2022 12:25

"Severe Reprimand"

FRC: "you've been a very very naughty boy"

Big Four: "Good job on cooking the books old chap, these fines are only a fraction of the costs for us, blimey, if we did things right and by the book, no one would do business with us"

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