PwC and EY fined over LC&F audits

Big Four firms PwC and EY have been fined by the FRC over their audits of collapsed minibonds firm London Capital and Finance (LC&F).LC&F collapsed into administration on 30 January 2019, owing about £237m to 11,625 individual bondholders. 

The Financial Reporting Council (FRC) said that PwC, who audited the LC&F’s 2016 accounts, has been fined £4.9m, reduced from an initial fine of £7m thanks to an early settlement. 

The firm will also have to provide a published statement in the form of a severe reprimand and declare that the 2016 audit report “did not satisfy the relevant requirements”. It must also take “specified action” designed to prevent the recurrence of the contravention.

PwC and partner Jessica Miller admitted eight breaches in relation to “identifying and assessing the risk of material misstatement, the exercise of professional skepticism with particular regard to the risk of fraud, and the auditing of loan debtors, prepayments, revenue, financial instrument disclosures, going concern and related party transactions”.

According to the FRC, the “most significant issue” was a “failure to obtain an adequate understanding of the nature of LCF’s business and the company’s internal controls, and to apply sufficient professional skepticism in that regard”. 

PwC resigned as LCF’s auditor in October 2017, and EY took over the group’s 2017 accounts. In relation to this, EY was fined £4.41m, again reduced from an initial fine of £7m.

EY and partner Neil Parker admitted six breaches, all relating to the same breaches made by PwC.

The FRC said EY’s failures included “multiple” breaches of fundamental requirements in several key areas, adding that there was again a “significant failure to gain a proper understanding of LCF’s business and internal controls, and to apply adequate professional skepticism”.

Jamie Symington, deputy executive counsel, said in relation to all three audits: “In each of these three audits the auditors failed to identify and assess the risks of material misstatement through understanding LCF’s business. 

“These breaches are made considerably more serious by the fact that all of the auditors knew they were auditing an expanding business which was engaged in selling unregulated financial products to retail investors, and that potential investors might place reliance on the clean audit opinions.”

In a statement to Accountancy Today, a PwC spokesperson said: “We are sorry our work in 2016 did not meet the standards expected and that we expect of ourselves. In the eight years since this work took place, we have made significant changes to our audit methodology, policies and guidance. Audit quality is our top priority and the results of the changes we have made have been recognised in our annual inspection and supervision reports from the FRC in recent years.”

An EY spokesperson added: “Our 2017 audit of London Capital & Finance fell short of our standards and for this we apologise. We have taken significant steps to address the issues identified and we are committed to learning from our mistakes. The delivery of high-quality audits remains our absolute priority and we continue to invest in technology and processes to drive continuous improvement. Our UK Audit Quality Strategy also emphasises the importance of a strong audit culture and professional scepticism.

“We have fully cooperated with the FRC throughout its investigation.”