Big Four firm PwC has been hit with fines by the Financial Reporting Council (FRC) over its audit work for BT.
The audit giant has received a penalty of £1.7m, and audit partner Richard Hughes has also been handed a £42,000 fine, after failing to “adequately document” the audit work across BT Italy’s debt adjustments.
Both PwC and Hughes admitted breaches of the rules in relation to the audits. The original penalties were reduced from £2.5m for PwC and £60,000 for Hughes due to early admissions of rules breaches.
“In determining the financial impact of a major fraud detected within a business, difficult but important issues relating to appropriate accounting treatment and disclosures will need to be addressed,” said Claudia Mortimore, deputy executive counsel at the FRC.
“It is vital that these are subject to robust audit so that the users of financial statements can have confidence that the financial impact is properly and accurately stated in subsequent financial statements.”
In addition to the fines, PwC and Hughes were also given “severe” reprimands by the FRC.
In July 2016, BT discovered fraud in its Italian operations. In its 2017 financial statements, the telecoms firm disclosed adjustments of more than half a billion pounds.
These adjustments were made up of corrections of prior-period errors of £268m and changes in accounting estimates of £245m.
BT also revealed debt adjustments of £72m in its accounts to the end of March 2017, which were examined by PwC.
The FRC said PwC and Hughes “failed” to approach the audit of BT’s treatment of the debt adjustments with “the necessary professional scepticism.”
The regulator added that PwC and Hughes did not “adequately” document the audit work across the entirety of the BT Italy adjustments.
The FRC has emphasised that there was no finding that BT’s 2017 financial statements were misstated, that the total sum of the BT Italy adjustments were wrong, or that the breaches were “intentional, dishonest or reckless”.
“The sanctions imposed in this case, where certain elements of the adjustments following a fraud were not subject to the required level of professional scepticism, underscore this message and will serve as a timely reminder to the profession,” added the FRC’s Mortimore.
PwC has said it is “sorry” that aspects of this audit were not of the “required standard”.
“The FRC’s finding relates to a narrow element of the audit and the regulator has not found that the 2017 Financial Statements for BT were misstated, or that the sum of the BT Italy adjustments was wrong. In addition, the FRC has closed its investigations into the 2015 and 2016 audits without identifying any matters of concern, added PwC.
“We have made significant investment in strengthening audit quality in recent years, which has been recognised in improved quality inspection results. We remain committed to maintaining and building on this progress through the delivery of consistently high-quality audits.”