PwC was responsible for the 2017 and 2018 financial audits of Babcock International Group plc, an LSE listed multinational with highly sensitive UK government contracts. The FRC final settlement decision notice details a litany of failures in connection with these audits with breaches “identified in respect of every area of audit which has been investigated”.

The breaches include “a number of examples where basic audit requirements were not followed”, which the FRC deemed to be evidence of “a lack of competence, care or diligence.”

During its audit work, the PwC audit teams repeatedly failed to challenge management or exercise sufficient professional scepticism in connection with the documentation they were reviewing. They also failed to obtain sufficient evidence to in support of their audit conclusions. A particularly egregious example involved a substantial contract, drafted in French, which was ‘reviewed’ by the audit team despite the fact that none of the team members possessed French language skills.

The teams also misclassified risks, did not carry out adequate testing, and repeatedly failed to detect and correct calculation errors.

Other fines

Although PwC was deemed to have cooperated in the investigations, which was considered a mitigating factor, the cooperation was not at the level that was expected, particularly in connection with errors and delays in providing documents to the investigating team. The FRC also considered the fact that PwC has been fined for four other investigations since 2019 an aggravating factor.

A substantial contract, drafted in French, which was ‘reviewed’ by the audit team despite the fact that none of the team members possessed French language skills.

In addition to the fine and censure PwC will have to implement a training programme intended to ensure that the audit problems identified during the investigation do not recur. PwC has also been asked by the FRC to revisit the non-financial sanctions against it in connection with the flawed audit of Kier Group plc to determine whether those sanctions “required augmentation to take account of the breaches” connected with the audits of Babcock. Presumably this will mean PwC taking another long hard look at what improvement work is required and needs to be undertaken in order to improve audit quality.

Two former PwC partners responsible for the audit have also received a financial sanction and a severe reprimand as a result of the investigation.