PwC fined £5.6m over Babcock audits

PwC has been sanctioned £5.6m by the Financial Reporting Council (FRC) for serious failings on audits of Babcock International Group plc in 2017/2018 as well as for one of its subsidiaries. The two audit partners have also been fined. 

Babcock is a multinational corporation headquartered in the UK providing, among other things, engineering services. Its main business is with public bodies, particularly the UK’s Ministry of Defence.

The recent FRC investigation concerned a number of areas of the audits, including seven long-term contracts, comprising approximately 25% of the FY2018 Babcock group revenue. A number of “serious breaches” were admitted by the respondents, including repeated failures to challenge management and obtain sufficient appropriate evidence as well as failures to follow basic audit requirements. 

The breaches investigated ran the risk that a material misstatement in the FY2017 and/or FY2018 Babcock group Financial Statements may have gone undetected. In particular, a lack of independence was identified in respect of the inappropriate provision of accounting advice by the PwC group audit team to Babcock and, in respect of the DRDL FY2018 component audit, one audit workpaper relating to a sensitive government contract created a false record of the audit evidence actually obtained.

Alongside the £5.6m fine, PwC also agreed to non-financial sanctions consisting of a severe reprimand, an order requiring review and amendment of certain PwC training programmes and a declaration that the audit reports signed on behalf of PwC did not satisfy the audit reporting requirements. 

Claudia Mortimore, deputy executive counsel, said: “This robust package of sanctions seeks to deter future breaches and encourage improvement by the firm., in circumstances where PwC has now been sanctioned four times since 2019.

“PwC conducted effective self-reviews into four of the areas under investigation, and in this respect exhibited exceptional cooperation. However, this has not attracted a further discount to sanctions, as it was countered by examples of errors, omissions and delays in providing material to the investigation, as well as the provision of some unclear or inaccurate responses.”

FRC is currently investigating PwC’s audits for FY19 and FY20 for Babcock Group.