PwC will pay a reduced punishment of 1.75 million pounds ($2.1 million) as part of sanctions against the Big Four firm for failings in its fiscal year 2017 audit of BT Group, after the U.K. telecoms major amended its financials to reflect an Italian fraud scandal.
Monday, the Financial Reporting Council (FRC) issued the penalty, along with a stern rebuke and a demand that PwC disclose its audit report did not comply with applicable criteria. The company avoided a £2.5 million ($3 million) regulatory penalties for early admissions.
Richard Hughes, who acted as engagement partner and senior statutory auditor for PwC throughout the BT audit, was also punished. Hughes received a reduced sentence of £42,000 (about $51,000) and a reprimand. He must also admit that he did not satisfy applicable criteria.
The specifics: The FRC noted in its decision notice that BT was alerted of wrongdoing at its Italian operation by a whistleblower in July of 2016. An external investigation of the allegations revealed in January 2017 accounting irregularities resulting from "misrepresentation" and "fictitious transactions," prompting BT to record £513 million ($622 million) in prior period error corrections and accounting estimate changes in its 2017 financial statements.
PwC identified this revelation as a major risk requiring more consideration. The FRC argued that the firm "failed to act with the requisite professional scepticism; did not obtain sufficient appropriate audit evidence; and did not determine whether the changes in accounting estimates were appropriate," particularly with regard to £72 million (US $87 million) in debt adjustments included among the accounting estimate changes.
Hughes was serving his first year as audit engagement partner at BT. He and PwC were further faulted for not preparing audit documentation “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 in relation to the BT Italy adjustments, generally,” the FRC stated.
PwC and Hughes violated International Standards on Auditing 200, 230, 500, and 540 due to the shortcomings.
The FRC said that its executive counsel "has not determined that the 2017 financial statements were erroneous, that the overall amount of BT Italy's adjustments was incorrect, or that the violations were deliberate, dishonest, or reckless." In its decision notice, the regulator stated that a member of PwC's U.S. regulatory advisory team found the ratio of BT's adjustments to be "unusual" and that such a finding should have prompted additional scepticism in the event that a restatement would have been required to comply with U.S. reporting requirements.
The FRC also examined PwC's audits of BT's financial statements for the 2015 and 2016 fiscal years. Those cases have been resolved without enforcement.
PwC response: “We are sorry that aspects of this audit were not of the required standard,” a firm spokeswoman said in an emailed statement. “The FRC’s finding relates to a narrow element of the audit, and the regulator has not found that the 2017 financial statements for BT were misstated, or that the sum of the BT Italy adjustments was wrong.
“… 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.”
By fLEXI tEAM