PwC fined £5mn over audits of London-listed construction groups

PwC has been fined twice in one day by the UK accounting regulator over audit failures at London-listed construction groups Kier and Galliford Try.

The Big Four accounting firm was ordered to pay £5mn after the Financial Reporting Council found problems in its audits of the companies, both of which have been hit by accounting errors in recent years.

The FRC found problems with PwC’s auditing of long-term contracts at the two companies, including the recognition of revenue and costs on large contracts at Galliford Try.

The fines are the latest regulatory action over audits in the construction and outsourcing sectors, where the accounting treatment of multiyear contracts and the validity of assumptions made by company management in preparing the accounts are key issues.

“Rigorous auditing of long-term contract accounting is particularly important in the audit of construction companies, where many contracts are spread over a number of years,” said Claudia Mortimore, the FRC’s deputy executive counsel.

“Auditors must not only ensure that they obtain sufficient appropriate audit evidence to support the accounting of the contracts, but also apply sufficient professional scepticism,” she said. “This is vital so that investors can have confidence in the financial statements.”

PwC was ordered to pay £3mn for failing to meet the regulatory requirements in its audit of housebuilder Galliford Try’s accounts for its 2018 and 2019 financial years. The penalty was reduced from £5.5mn in recognition of the Big Four auditor’s co-operation, the FRC said.

The watchdog said PwC had not done enough to challenge assertions made by the management of Galliford Try, which was found in 2020 to have overstated its assets by £94.3mn.

It was handed a further penalty of almost £2mn, reduced from £3.35mn, for its audit of Kier’s accounts for the year ended June 2017, during which it failed to spot errors in the company’s income and cash flow statements.

At both Galliford Try and Kier, PwC had not shown appropriate professional scepticism and had failed to gather sufficient evidence in its audits, the regulator found.

PwC also agreed to pay more than £756,000 to cover the cost of the two FRC investigations.

Jonathan Hook, the partner who led the audits of both companies, was given two fines totalling more than £135,000. He retired from the firm last year. Both Hook and PwC were given severe reprimands by the regulator.

“We are sorry that aspects of our work were not of the required standard,” said PwC.

The firm said it had invested heavily in improving audit quality, including in relation to long-term contracts, since the audits of Kier and Galliford Try.

PwC was instructed by the FRC to review its audits of listed companies, where long-term contracts are prevalent and to report back to the regulator on the results. The firm received the best score out of the Big Four accounting firms in the FRC’s most recent quality inspections.

The FRC’s investigations into PwC’s audits of Kier and Galliford Try, revealed by the Financial Times in February, are the latest regulatory actions against auditors of UK-listed contractors.

Deloitte was ordered in April to pay a fine and costs of more than £2mn for audit failures at Mitie, while Grant Thornton was fined £700,000 in November for problems with its review of the accounts of Interserve, which fell into administration in 2019.

The FRC is also investigating KPMG for signing off the accounts of outsourcer Carillion before it went into liquidation, and mid-tier accountant BDO over its auditing of NMCN, a London-listed construction company that went into administration in October.

The regulator said in January it was probing PwC’s work at defence contractor Babcock, which has also disclosed accounting errors in recent years.

The FRC is also reviewing PwC’s audits in other sectors, with investigations under way into its audits of BT, Eddie Stobart Logistics, collapsed minibond company London Capital and Finance and Wyelands Bank, owned by steel tycoon Sanjeev Gupta.