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Another week, another auditor on the naughty step

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PwC is the latest Big Four firm to receive a fine of over a million pounds, confirming that large accountancy practices are regularly failing stakeholders and audits. 

11th Aug 2022
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The world of accountancy and, more specifically, auditing seems to have coined a new phrase – “If at first you don’t fail, try, try, try again.”

Every week, there seems to be a new story about woefully inadequate auditing, generally emanating from the largest firms in the land, although that may just be because they generate bigger headlines.

The latest disaster leading to a sanction from the Financial Reporting Council (FRC) relates to PwC’s audit of BT Group plc in 2017.

The firm and partner involved each admitted breaches of relevant requirements in relation to the audit of adjustments between current and prior years following the identification of the fraud in BT’s Italian operations in 2016.

According to FRC, “PwC had identified the accounting treatment and related disclosures in respect of the impact of the fraud as a significant risk. There was a need for heightened professional scepticism in relation to BT’s treatment of the [£72m] BT Italy Adjustments and in particular the relative amounts attributed to the correction of prior-period errors and changes in accounting estimates given: (i) the particular requirements of the applicable accounting standard, IAS 8; (ii) queries raised by PwC USA’s regulatory advisory team as to the ratio of the adjustments and whether they were fully supported by evidence; and (iii) if the errors were material in any prior period a ‘restatement’ would be required for US reporting purposes and BT had stated the value of the errors to fall short of the materiality thresholds in all relevant years (2012 to 2016), and only just short (by approximately £1m) of the materiality threshold in 2016.”

More luck than judgment

Even though the financial statements were not found to have been misstated, this seems to have been more luck than judgment, given that PwC “(i) failed to act with the requisite professional scepticism; (ii) did not obtain sufficient appropriate audit evidence; and (iii) did not properly determine whether the changes in accounting estimates were appropriate. In relation to the total sum of the BT Italy Adjustments the respondents also failed to prepare audit documentation that was sufficient to enable an experienced auditor, having no previous connection with the audit, to understand the nature, timing and extent of the audit procedures performed.”

If this were a one-off, we would sigh and wonder why the great and the good of our profession had lapsed from the impeccable standards that we and every stakeholder have every right to expect.

Unfortunately, these failures are becoming the norm. In this particular case, PwC was originally fined £2.5m, although this was reduced to £1.75m for admission/early disposal. To put this into perspective, according to media reports, as a consequence of the resulting financial scandal £8bn was wiped off BT’s market value.

The partner involved was penalised £60,000 reduced, once again, by 30% to £42,000.

Both parties also received a severe reprimand and a declaration that the audit report did not satisfy the relevant requirements.

Negligible penalties

Will this stop them from doing it again? I doubt it and really wonder whether big accountancy firms now price in negligible FRC penalties as part of the cost of doing business.

While nobody wants to lose £1.75m, once again PwC partners are laughing all the way to the bank. Looked at from a micro perspective, PwC’s fee for carrying out the BT audit in 2017 was apparently £4.3m; in other words the fine represents approximately 40% of the fee for a grossly incompetent audit.

Judged on a corporate scale, when it comes to global revenues, PwC is expected to weigh in at a hefty $50bn in the year to 30 June 2022, which at current exchange rates is over £40bn, with around 10% of that amount generated in the UK.

The gentleman involved (this might sound sexist but almost all of the recent cases seem to involve male partners) has apparently very recently retired but given average profit shares at PwC of £920,000, a fine of £42,000 will not do material damage to his pension fund.

We shall have to see what happens if and when the Audit Reporting and Governance Authority (ARGA) finally replaces FRC, but unless there is a big change in attitudes, poor auditing will continue to be far too common.

Replies (3)

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By Hugo Fair
11th Aug 2022 16:28

"The gentleman involved .. has apparently very recently retired".

Of course he has ... when the partners are deciding who to put on the shortlist of sacrificial lambs, it's one of the key pre-qualifiers (willingness to take 'early retirement'), along with disposability.

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By Hugo Fair
11th Aug 2022 16:41

Obviously no direct parallels to the above story, but with each new report I find myself reminded of a conversation with a D.I. twenty or so years ago.

I was berating him for the appallingly low arrest figures related to burglaries in London - pointing out that he couldn't blame the courts if his force didn't even charge perceived perpetrators.
"Oh but we do", he said. "We generally charge them with something like 'going equipped', which is must easier to prove and has the major advantage of relatively minimal paperwork."
"But what about recovering stolen property? I know you don't always search their premises or indeed anything else."
"Well I doubt we'd get a high hit-rate ... but what we would get is a mountain of paperwork plus all those resources consumed in trying to track down possible owners of any property recovered - which is almost as fruitless a task as putting them in front of the bench"!

So ... minimise the effort/cost to achieve something that can be claimed as a 'success', even though the elements considered by most to be the priority remain un-tackled. Remind you of anything?

Thanks (1)
Danny Kent
By Viciuno
12th Aug 2022 10:02

"this might sound sexist but almost all of the recent cases seem to involve male partners"

It doesn't sound sexist. It is. Just a spurious correlation.

He didn't do a bad job because he was male. But because he was a bad auditor.

It's nothing but a numbers game. I don't know actual figures, but quick google (so not exactly a reliable source but close enough) has females as just 33% of partners in accounting firms. The odds are therefore that the bad apples will be male.

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