PwC has been hit with a £3.2 million fine by the Financial Reporting Council (FRC) for serious audit failures concerning London-listed engineering firm Babcock International, following an investigation that revealed widespread shortcomings in its 2019 and 2020 financial year audits. The penalty represents a significant reduction from an initial £5.5 million due to cooperation, admissions, and early disposal. Former audit partner John Waters received a £59,062 sanction, reduced from £100,000.
The FRC's disciplinary action stems from numerous breaches during the audits of Babcock, including failing to adequately challenge management’s accounting choices, neglecting to appropriately respond to risks of material misstatement, and insufficiently verifying audit evidence in several core areas. These shortcomings ultimately led to material restatements in Babcock’s 2021 financial statements, necessitated by the need to correct previous errors.
This is not PwC's first run-in with the FRC over its auditing of Babcock. In March 2023, a separate investigation resulted in PwC and two other former partners being fined a combined sum of almost £8 million for repeated failures to challenge Babcock’s management and insufficient evidence gathering during the company's 2017 and 2018 audits. The FRC had previously stated that PwC failed to obtain crucial information regarding a 30-year contract, which accounted for approximately £77 million of Babcock’s 2018 revenues.
Penrose Foss of the FRC commented on the latest fine, stating that “the quality of these audits fell short of the standards expected of statutory auditors.” She acknowledged the challenging circumstances faced by the audit engagement partner in FY2019 but emphasised that both the firm and the partner should have collectively ensured these challenges were addressed and audit work performed according to applicable standards.
The repeated regulatory action against PwC underscores a broader push by the FRC to improve audit quality among the Big Four firms. The ongoing scrutiny of audit firms, particularly those working with FTSE 100 companies, could have wider implications for the UK financial sector, including higher compliance costs across the auditing industry and increased pressure on investor confidence in company accounts.