PricewaterhouseCoopers has received penalties totalling £5m for failures in its audit of the construction firms Galliford Try and Kier, in the latest fines imposed on a “big four” accounting firm.
The Financial Reporting Council, the accounting watchdog, also imposed a £136,000 fine on the head of PwC’s construction division and issued severe reprimands to PwC, which it said had failed to adequately scrutinise long-term contracts at both builders, among other failings. It ordered the firm to review its audit work of listed companies that rely on long-term contracts.
PwC will pay about £3m related to its failings in the audit of Galliford Try, and £2m related to its audit of Kier.
Jonathan Hook, the PwC global engineering and construction leader, was also reprimanded and fined £82,875 for his role in the audit of Galliford, one of the UK’s biggest housebuilding, regeneration and construction groups, and a further £52,650 in relation to Kier.
A number of high-profile corporate collapses including Carillion and BHS has led to calls for a breakup of the four big accounting and consultancy firms – PwC, EY, KPMG and Deloitte – to tackle potential conflicts of interest. Last month, EY said it was drafting plans to spin off its audit business, in what would be the biggest shake-up in the sector in decades.
The FRC said PwC and Hook had admitted breaches of accounting rules, as they insufficiently challenged management’s assertions about some of Galliford’s long-term contracts in the 2018 and 2019 audits and displayed a “lack of professional scepticism”.
The company’s results had to be restated, which reduced profits in the year to 30 June 2018 by 22% and also resulted in reductions in net assets for 2018 and 2019.
The FRC said PwC and Hook had “failed to identify and correct errors” in Kier’s accounts for 2017, relating to corporate disposals. They also did not adequately challenge the company’s accounting estimates and failed to carry out the audit with “sufficient professional scepticism”.
The watchdog does not believe the breaches were intentional, dishonest or reckless and noted that PwC had since introduced a number of measures designed to improve the quality of its audit work on long-term contracts. It will report the results to the FRC over two years.
PwC said: “We are sorry that aspects of our work were not of the required standard. Since these audits were completed we have invested heavily in an ongoing programme to strengthen audit quality, which has included measures to support the audit of long-term contracts. We have seen the positive impact of the actions we’ve taken through improved inspection results and other quality indicators over recent years, and we remain committed to the delivery of consistently high-quality audits.”
The penalties would have been even higher if PwC and Hook had not cooperated with the investigation and admitted their failings at an early stage. The FRC said it would otherwise have fined the company £5.5m for its failings at Galifford Try and £3.35m in relation to Kier.
Claudia Mortimore, the FRC deputy executive counsel, said: “Rigorous auditing of long-term contract accounting is particularly important in the audit of construction companies, where many contracts are spread over a number of years. Auditors must not only ensure that they obtain sufficient appropriate audit evidence to support the accounting of the contracts, but also apply sufficient professional scepticism. This is vital so that investors can have confidence in the financial statements.”
