The FRC has imposed a financial sanction of £3.2m, and issued a severe reprimand, to PwC over its audit of Babcock in FY2019 and FY2020.
PwC also agreed to pay Executive Counsel’s costs of the investigation.
PwC audit partner John Waters also received a severe reprimand and was fined £59,062.
Babcock is a Public Interest Entity (PIE). It is a multinational corporation headquartered in the UK, and its shares are listed on the Main Market of the London Stock Exchange. It provides engineering services and other services (in the UK and internationally) in relation to maintaining, upgrading, operating and managing significant infrastructure and essential equipment. A number of its contracts are UK government contracts, including contracts with the Ministry of Defence.
PwC and Waters admitted serious and numerous breaches of Relevant Requirements in relation to the auditing of cash pooling; financing arrangements in relation to a specific overseas contract; capitalisation of certain costs on aircraft; an intangible asset; assessment of goodwill impairment; certain credit notes on aircraft; and two long-term contracts, across both audit years. Material restatements were made in the FY2021 financial statements to correct prior period errors associated with some of the breach areas.
FRC said both PwC and Waters failed to exercise adequate professional scepticism and to obtain sufficient appropriate audit evidence in all those areas of the audits, and to achieve fair presentation and compliance with accounting standards in five areas. In these areas, they failed adequately to challenge management as to whether management’s accounting approach was compliant with the financial reporting framework, and demonstrated an insufficient audit response to the risk of material misstatement.
With regard to Waters’ position, FRC agreed he faced severe challenges in discharging his responsibilities as audit engagement partner, including as a consequence of being appointed to the FY2019 Audit at short notice, after the audit had commenced, and not having had the opportunity for any handover from his predecessor. The COVID-19 pandemic made the FY2020 Audit significantly more difficult.
- In March 2023, the FRC announced sanctions against PwC and two audit engagement partners in relation to the FY2017 and FY2018 audits of Babcock and one of its subsidiaries.
