The UK’s Financial Reporting Council (FRC) has imposed sanctions on PricewaterhouseCoopers (PwC) and audit engagement partner John Waters for lapses in the audits of defence contractor Babcock’s financial statements for 2019 and 2020.
The FRC’s executive counsel issued a final settlement decision notice under the audit enforcement procedure, concluding its investigation into the work carried out on those two years’ accounts.
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PwC has been fined £3.24m, while Waters faces a financial penalty of £59,062. In addition, PwC has been ordered to pay the executive counsel’s investigation costs.
According to the regulator, both PwC and Waters admitted to a series of breaches. These related to areas including aircraft-related costs, cash pooling, financing arrangements, goodwill impairment assessments, intangible assets and long-term contracts.
The FRC said PwC and Waters did not apply sufficient “professional scepticism” or obtain adequate and appropriate audit evidence in each of these areas.
It added that they failed to secure fair presentation and compliance with accounting standards in five aspects of the audits.
As part of the agreed sanctions, PwC will review and report to the FRC on elements of its procedures.
This will cover how the company handles changes of audit engagement partners during an ongoing audit and how it responds to signs of rising audit risk during an engagement.
FRC investigations and enforcement executive director Penrose Foss said: “In March 2023, the FRC announced sanctions against PwC and two audit engagement partners in relation to the FY2017 [financial year 2027] and FY2018 audits of Babcock and one of its subsidiaries.
“Following a separate investigation in relation to the FY2019 and FY2020 audits, PwC and the new audit engagement partner appointed in relation to those financial years have admitted serious and numerous breaches.
“These included significant contraventions of the fundamental requirements to perform an audit with adequate professional scepticism and to evaluate effectively whether the financial statements complied with accounting standards and achieved fair presentation of the underlying transactions.
“The quality of these audits fell short of the standards expected of statutory auditors.”
