Britain’s accounting watchdog has hit PwC with a record 5.1 million pound ($6.6 million) fine and a severe reprimand for “extensive misconduct” in its audit of a troubled professional services firm.
The Financial Reporting Council announced the sanctions on Wednesday after an investigation of the audit of the financial statements of RSM Tenon Group for the financial year ended June 30, 2011. RSM went bust in 2013 after having to restate its 2011 accounts.
PwC and senior audit partner Nicholas Boden, the FRC said, had admitted that they failed to obtain sufficient appropriate audit evidence and exercise sufficient professional scepticism during the audit.
“The misconduct was extensive,” the council said in a news release, citing audit deficiencies in such areas as the accrual of employee bonus payments, recognition of amounts recoverable on contracts, the accounting for a lease, and the calculation of goodwill in relation to a subsidiary.
To settle the allegations, the FRC imposed an initial penalty of 6 million pounds ($7.7 million) on PwC, which was reduced to 5.1 million pounds following a settlement discount. It also fined Boden 115,740 pounds ($186,760).
“The ruling is the latest in a string of actions taken by the FRC against [PwC] and its Big Four rivals, as the watchdog flexes its muscles in an attempt to drive up audit quality,” The Financial Times reported.
In what had been the previous record, the council in May fined PwC 5 million pounds for misconduct relating to its audit of housing group Connaught. The FRC has also launched a probe into the firm’s auditing of British Telecom.
But Prem Sikka, an accounting expert at Essex University, was skeptical that the FRC’s crackdown would deter bad auditing practices.
“There is an absence of a good framework of accountability for auditors … A five million pound fine is less than half a day’s work for PwC,” he told the FT.
Correcting the errors in the RSM Tenon statements cut the firm’s 2011 pretax profits by 12.1 million pounds ($15.6 million). “Audit quality is of paramount importance,” PwC said in apologizing for the audit.