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Revolut named as subject of ‘inadequate’ BDO audit | AccountingWEB
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Revolut named as subject of ‘inadequate’ BDO audit

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Revolut has been outed as the unnamed financial services provider subject to a problem audit from BDO, with the fintech rapped for its lax approach to controls and the challenger for not showing enough professional scepticism.

 

7th Sep 2022
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Revolut is under pressure to improve its internal accounting controls after regulators found significant flaws in the auditing of its financial results.

The mobile payments group was revealed by the Financial Times as the unnamed financial services provider whose audit by accountancy firm BDO was criticised as “inadequate” by the Financial Reporting Council (FRC).

In its annual report on the quality of BDO’s work published in July, the FRC said the audit of an anonymous group had suffered from an inadequate approach to revenue recognition, meaning the risk of material misstatement was “unacceptably high”.

More challenging

Following the criticism by the FRC, BDO was now being “significantly more challenging” towards Revolut in response, a source told the paper, which may cause delays to the fintech firm’s filing of its accounts.

It suffered an exodus of senior staff in recent months and is facing mounting regulatory pressure. Japan’s Financial Services Agency on Friday also ordered the mobile money app to improve its money laundering controls.

Officials found “serious problems” with governance, management of outsourced contractors, money laundering and terrorist financing risk management, in line with the rebuke from European watchdogs.

Improvements needed

In its report, the FRC also said that BDO’s testing of Revolut’s payment processes had contained failings that could have resulted in a misstatement. 

Revolut, referred to as “financial services provider” in the FRC paper, would need to improve “unsexy things like its back office and controls” as it had “the culture of a tech firm” but needed “a back office like a bank”, an internal source told the paper.

Revolut’s annual revenue was £261m in 2020. It raised $800m (£691m) in a funding round led by SoftBank and Tiger Global last year which valued the firm at $33bn (£28.5bn), a six-fold increase on the $5.5bn the company was worth in 2020. It is the second-largest fintech in Europe and the UK’s number one.

High executive turnover

The aggressive growth has come with a price – high turnover of key executives. UK chief risk officer Victoria Stubbs, UK head of regulatory compliance Justine Wootton and UK money laundering reporting officer Mathew Seneviratne have all walked in recent months.

Revolut Group Holdings Ltd, the group parent company, and Revolut Ltd must file 2021 accounts by the end of September. 

The books were due 10 June for Revolut NewCo UK, the entity marked for the UK banking licence applied for by Revolut in January 2021, but which it still has not obtained. Other UK offshoots including Revolut FIC Ltd, which handles digital assets, and Revolut Travel Ltd, are also due to file at the end of September. 

Delays in filing accounts can lead to the prosecution of company directors, and civil penalties against the company itself under UK law.

Both BDO and Revolut declined to comment. The FRC also declined to comment.

Material misstatement risk

“A material misstatement is the fancy way of saying a ‘big error’; one big enough to change the decision someone might make based on those financial statements,” said Robert Collings, head of finance at Flux. “It’s impossible to make financial statements 100% error free so the FRC is saying, based on the audit work of BDO, it thinks there is a high likelihood of a big error in those financial statements. It's not actually an error it found, just it thinks there could be one or more because of the audit work – or lack of – performed.”

The Revolut audit was conducted with an “inadequate” approach to revenue recognition, meaning that “the risk of an undetected material misstatement was unacceptably high”, regulators found.

“There is some subjectivity on recognising revenue, it’s not always clear cut,” Collings told AccountingWEB. “From Revolut’s point of view, it’s very hard to get financial controls operating to the best standard when there is such fast growth, and that’s probably also why BDO struggled.”

Unsupervisable and unauditable

Former regulator Peter Oakes, Fintech Ireland founder, said there was an argument that Revolut could be “both unsupervisable and unauditable” and it should share the blame for its woes with BDO. 

He said Revolut’s ongoing failure to obtain bank authorisation in the UK or Ireland should prompt more probing questions from auditors, as the Irish regulator has not received a bank licence from the firm. Revolut states it has full authorisation from Lithuania, which allows it to passport services across the European Union.

“It seems that when it comes to Revolut, every stakeholder should be more sceptical and challenging across the board,” Oakes said. On the matter of strengthening “unsexy” back office controls, he said these are “the backbones of sustainable banking and payments firms”.

“Others can get it right, why not a $33bn unicorn?” Oakes said. “Something needs to happen otherwise there is an accident of monumental proportions in the offing.”

 

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Replies (7)

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By Paul Crowley
07th Sep 2022 14:52

Are audits getting to be impossible to comply with?
Big four ditching problem clients but nobody else able to deal with these problem clients
Maybe go back to word derivation
Audit comes from the word to hear
Get client to read out loud all the words and figures in the accounts.
Auditor then signs a report saying that he has audited (as in heard) the accounts
Probably as good a system as we have now

Thanks (2)
Replying to Paul Crowley:
By jon_griffey
08th Sep 2022 09:35

Paul Crowley wrote:

Are audits getting to be impossible to comply with?
Big four ditching problem clients but nobody else able to deal with these problem clients

It makes you wonder. I bet the 75% or so of audits that were found to be good or requiring only limited improvements were peachy clients that are easy to audit, and thus probably don't really benefit from an audit. The 25% will include the difficult cases like this where it is probably near impossible for any firm to do a good audit. Who would want to take these clients on?

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Replying to jon_griffey:
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By Paul Crowley
08th Sep 2022 12:34

Agree
Nobody ever says 'well done, good audit'
And regulators love to look for holes, despite the area in question being under control and comparatively risk free.

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By cbarling
08th Sep 2022 09:30

My guess would be that there is a problem with the culture in the company and the auditor hasn't robustly challenged it enough. Of course if they do they would lose the audit, which is the problem with the way things work currently.

As has been seen at Uber, Facebook/Meta and WeWork, winning the growth war tends to involve some bare knuckles practises. The fact that the senior employee turnover is all around compliance says it all.

They probably now need a change of top leadership - and I speak as someone involved in many tech start-ups as well as experience of being on a FTSE-100 financial services audit committee.

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By AndrewV12
08th Sep 2022 09:37

I would love to know what inquisitional investors and any other large investors make of Audited Accounts.

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Replying to AndrewV12:
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By cbarling
08th Sep 2022 13:48

Institutional investors may or may not make that much of the accounts.

But they do want to know that revenue has been properly recognised (Carillion, Autonomy) and that the money that the accounts say is in the bank really is in the bank (Wirecard).

I don't think that's too much to ask given the fees that these larger auditors charge and the amount that the partners make (typically £0.5m - £1m per annum + early & cushy retirement) .

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By listerramjet
08th Sep 2022 10:25

does this sort of thing give them a thrill? I doubt it sells many papers! Most financial service back offices are essentially large collections of tech - internal and contractors - although it is becoming more common for the tech to be cloud based. And what does "serious" even mean? And why are they making this "rap on the knuckles" public. Either BDO are complying with their audit licence or they aren't. All very well getting excited about controls, but Revolut is a UK private company, so there is no suggestion SOX applies. Seems like needless washing laundry in public

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