PwC has been fined almost £1.8m for failing to properly scrutinize the accounts of telecoms company BT after a £500m accounting fraud had been uncovered at its Italian operation.
The accounting giant failed to act with the “requisite professional scepticism” and did not obtain “sufficient appropriate audit evidence” in its work on BT’s 2017 financial statements, which had to be adjusted by £513m because of the Italian scandal, according to the Financial Reporting Council (FRC).
The UK’s accounting regulator also severely reprimanded PwC, which was paid £4.3m for its work on BT’s accounts, and Richard Hughes, the audit engagement partner at the firm. The FRC fined PwC £1.75m and Hughes £42,000.
“The respondents failed to act with the requisite professional skepticism [and] did not obtain sufficient appropriate audit evidence,” the FRC said in its 27-page final ruling published on Monday. “The respondents did not approach the audit of BT’s treatment of the debt adjustments with the necessary professional skepticism and they failed to adequately document their audit work across the entirety of the BT Italy adjustments.”
The 2017 scandal wiped almost £8bn off BT’s market value, prompted a restructuring including the axing of 4,000 jobs, and ultimately was a factor that resulted in the departure of former chief executive Gavin Patterson as investors lost confidence in management.
The FRC also said PwC and Hughes had not produced an audit that was understandable to third parties.
“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,” said the regulator.
However, the FRC’s executive counsel said its decision did not mean that BT’s 2017 financial statements were misstated, that the £513m adjustment for Italy was wrong or that the breaches it found were “intentional, dishonest or reckless”.
The FRC fined PwC and Hughes £2.56m in relation to the audit of the 2017 accounts, but reduced this by 30% because the issues were raised by the parties at an early stage.
“In determining the financial impact of a major fraud detected within a business, difficult but important issues relating to appropriate accounting treatment and disclosures will need to be addressed,” said the FRC deputy executive counsel, Claudia Mortimore.
“It is vital that these are subject to robust audit so that the users of financial statements can have confidence that the financial impact is properly and accurately stated in subsequent financial statements. The sanctions imposed in this case, where certain elements of the adjustments following a fraud were not subject to the required level of professional skepticism, underscores this message and will serve as a timely reminder to the profession.”
PwC has been sanctioned five times since 2018.
The FRC has previously fined PwC a total of more than £17m in relation to audit failings for clients Taveta, Redcentric, Kier Group and Galliford Try.
In 2020, PwC was the largest accountancy firm in the UK with revenue of £3.5bn, of which £754m was for auditing services.
“We are sorry that aspects of this audit were not of the required standard,” said a spokesperson for PwC. “We have made significant investment in strengthening audit quality in recent years, which has been recognized in improved quality inspection results. We remain committed to maintaining and building on this progress through the delivery of consistently high-quality audits.”