The Financial Reporting Council has imposed sanctions against PwC and two former audit partners over the audits of Babcock International Group plc and Devonport Royal Dockyard Limited.
PwC received a severe reprimand and fined £7.5m, adjusted down to £5,625,000. An order was also put in place requiring a review and amendment of certain PwC training programmes.
Campbell Lambert was also severely reprimanded along with Heather Ancient. Lambert was ordered to pay a £150,000 fine and Ancient £48,750.
Babcock is a multinational corporation headquartered in the UK providing, among other things, engineering services. Its main business is with public bodies, particularly the UK’s Ministry of Defence. A number of its contracts are highly sensitive UK government contracts and its work therefore attracts significant public interest in the UK.
The FRC investigation concerned a number of areas of the audits, including seven long-term contracts, comprising approximately 25% of the FY2018 Babcock group revenue.
Numerous, serious breaches were admitted by the respondents. Breaches were identified in respect of every area of audit investigated and included:
- Repeated failures to challenge management and obtain sufficient appropriate evidence, reflecting a general reluctance to challenge management across these parts of the audits.
- Examples of a failure to follow basic audit requirements, evidencing a lack of competence, care or diligence. For example, there was no evidence that the audit team had, whether in FY2018 or before, obtained and read a 30-year Public Private Partnership contract with FY2018 revenue of c.£77m and lifetime revenue of £3bn, and one contract – with an initial value of c.€640m – was written in French, but the audit team neither possessed French language skills nor obtained a translation of the contract.
Many of the matters to which the breaches relate were qualitatively material to users of the financial statements. In aggregate, the breaches ran the risk that a material misstatement in the FY2017 and / or FY2018 Babcock group Financial Statements may have gone undetected. In particular, had the auditor appropriately applied the audit standards in FY2018, they should have required clear disclosures in Babcock’s FY2018 Financial Statements explaining the positive impact on operating profit of significant one-off items.
A lack of independence was identified in respect of the inappropriate provision of accounting advice by the PwC group audit team to Babcock and, in respect of the DRDL FY2018 component audit, one audit workpaper relating to a sensitive government contract created a false record of the audit evidence actually obtained.