In a case unusual because it involved two accounting firms, the Financial Reporting Council (FRC) has hit PwC with a record £5.1m fine and a severe reprimand after the Big Four firm admitted its failure to obtain sufficient audit evidence and show professional scepticism during its 2011 audit of RSM Tenon.
In a statement released by the accounting watchdog on Wednesday, PwC and Nicholas Boden (ICAEW member and the firm’s senior auditor) accepted that their audit of collapsed firm RSM Tenon fell short of professional standards.
PwC’s “extensive misconduct” comprised five separate acts, including the accrual of bonus payments, certain aspects in relation to the recognition of work in progress and amounts recoverable on contracts, the accounting for a lease, the assessment of the impairment of goodwill and the calculation of goodwill in relation to a subsidiary.
The FRC initially fined PwC £6m but reduced the amount to £5.1m after a settlement discount. Boden was fined separately £114,750 (reduced from £150,000 due to mitigating factors and a settlement discount).
PwC was ordered to pay the FRC’s executive counsel £500,000 towards costs.
The collapse of RSM Tenon
As previously reported, RSM Tenon dropped PwC as its auditor in December 2012after discovering the accounting errors that the Big Four firm failed to uncover. Tenon informed investors at the beginning of that year that it was restating its accounts, but following this announcement the firm’s profits dropped from £7.3m to £683,000.
The crisis-hit firm subsequently entered administration in August 2013, with Baker Tilly picking up the beleaguered firms’ profitable trading operations.
Before the FRC launched its investigation in 2012, PwC claimed RSM Tenon misled them during their audit work, but in a statement following the FRC’s decision PwC took a more conciliatory tone: “We are sorry that aspects of the audit carried out in 2011 fell short of professional standards. We co-operated fully with the FRC during its lengthy investigation and accept its findings.”
It added: “We continually review and update our audit processes in response to both internal reviews and external inspection findings. Audit quality is of paramount importance and our annual Audit Quality Reviews show year-on-year improvements.”
PwC’s 2017 audit woes
This is not the first time this year PwC has been pulled up over its auditing. In May it was hit with what was then a record £5m fine from the FRC over its auditing of Connaught.
Across the pond, PwC’s auditing faced similar scrutiny after settling a civil complaint for $1m following an alleged flawed audit of Merill Lynch. And the Big Four firm made Oscar headlines after two of its tax partners blundered the best picture envelope announcement, causing presenters Warren Beatty and Faye Dunaway to crown the wrong film.
However, PwC was not the only Big Four firm in the news this week. KPMG received a $6.2m fine from the US Securities and Exchanges Commission following the shortcomings of its audit of Miller Energy Resources.
While PwC didn’t uncover RSM Tenon’s accounting errors, should questions be asked why an accounting firm had the errors in the first place?