PwC has been hit with not one but two fines on the same day from the Financial Reporting Council, over its audits of Galliford Try and Kier.
PwC and audit engagement partner Jonathan Hook were fined £3m and £82,875 respectively over the 2018 and 2019 audits of construction company Galliford Try. Both firm and partner were also severely reprimanded.
At the time of the FY2018 and FY2019 audits, the company was one of the UK’s leading housebuilding, regeneration and construction groups. The valuation of construction contracts was identified as a significant risk in the audits. In the 2019 audit an additional significant risk – that the recognition of material variations and claims on contracts may not be appropriate – was identified. PwC and Hook have admitted breaches of Relevant Requirements as follows:
(i) In respect of the audits, in relation to the audit of the revenue and costs recognised on a large and complex long term construction contract. The breaches relate to compliance with applicable accounting standards; insufficient challenge of management’s assertions and lack of professional scepticism; the sufficiency and appropriateness of audit evidence obtained; and the extent of documentation included in the audit file.
(ii) In respect of the 2018 audit only, in relation to: (a) the appropriateness of the company’s accounting treatment for revenue and costs recognised on three long-term construction contracts; lack of professional scepticism; sufficiency and appropriateness of the audit evidence obtained and the documentation of the auditor’s considerations; (b) audit documentation in respect of the appropriateness of transactions with a joint venture being included in operating cash flows; (c) the selection and testing of construction contracts; and (d) the documentation and testing of controls over aspects of the Company’s accounting for long-term contracts.
In a separate case looking at the Kier audit of 2017 PwC was fined £2m, and severely reprimanded. Hook was again the audit engagement partner and he was fined a further £52,650 and received a severe reprimand.
Long-term contracts accounted for the majority of the Keir’s construction division’s revenue. Contract accounting was identified as a significant risk during the planning of the Audit and was a Key Audit Matter in the Auditor’s Report. Despite this, when performing audit work on four contracts, the respondents failed to obtain sufficient appropriate audit evidence; perform adequate testing or carry out substantive procedures on the company’s accounting estimates; prepare sufficient audit documentation to support conclusions reached and carry out the audit with sufficient professional scepticism. However, these errors did not cause the 2017 financial statements to be misstated.
Separately, the respondents failed to identify and correct errors in the Keir’s income and cash flow statements relating to the presentation of gains on corporate disposals completed in the 2017 financial year. This error did cause the 2017 financial statements to be misstated. However, the company’s underlying results were unaffected by the restatement in the 2018 financial statements.
