Sanctions against PricewaterhouseCoopers LLP and audit partner (in relation to PwC’s audit of Galliford Try)
News types: Inspection, Investigations, Statements
Published: 7 June 2022
The Executive Counsel of the Financial Reporting Council (the FRC ) has issued a Final Settlement Decision Notice under the Audit Enforcement Procedure and imposed sanctions against PricewaterhouseCoopers LLP ( PwC ) and Jonathan Hook, Audit Engagement Partner (together, the Respondents ), in relation to the statutory audits of the consolidated financial statements of Galliford Try Plc (the Company ), for the years ended 30 June 2018 (the 2018 Audit ) and 30 June 2019 (the 2019 Audit ).
The following sanctions have been imposed:
PwC:
- A financial sanction of £5.5 million, adjusted for aggravating/mitigating factors (in particular reflecting an exceptional level of cooperation) by a reduction of 15% and further discounted for admissions/early disposal by 35% to £3,038,750;
- Non-financial sanctions, comprising:
- a Severe Reprimand; and
- a declaration that the Statutory Audit Reports for FY2018 and FY2019 did not satisfy the Relevant Requirements.
Mr Hook:
- A financial sanction of £150,000 adjusted for aggravating/mitigating factors (in particular reflecting an exceptional level of cooperation) by a reduction of 15% and further discounted for admissions/early disposal by 35% to £82,875.
- Non-financial sanctions, comprising:
- a Severe Reprimand; and
- a declaration that the Statutory Audit Reports for FY2018 and FY2019 did not satisfy the Relevant Requirements.
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 Mr 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.
The Executive Counsel does not assert that the breaches were intentional, dishonest or reckless and has taken into account that, since the Audits, PwC has introduced a number of measures designed to improve the quality of audit work on long-term contracts.
The Company’s consolidated financial statements for the year ended 30 June 2020 reflect prior year adjustments and therefore the restatement of prior year balances. The combined impact of the restatements, net of associated tax liabilities, was a £94.3 million reduction in net assets and retained earnings as at 30 June 2018, and £72.4 million as at 30 June 2019. The adjustments represented a 22% reduction in the total reported profit and a 12% reduction in net assets for the year ended 30 June 2018. The adjustments had no impact on the total reported profit for the year ended 30 June 2019, but represented a 10% reduction in net assets at 30 June 2019. The adjustments relate to the Company's accounting for revenue and claims associated with certain long-term contracts, including that noted in (i) above. Not all of the breaches of Relevant Requirements noted above correspond with matters that were the subject of the restatements.
PwC and Mr Hook provided an exceptional level of cooperation with the investigation. The early stage at which admissions were made has also been reflected in the discount applied to the financial sanctions.
Claudia Mortimore, Deputy Executive Counsel said:
“This is the second Decision Notice published today in relation to PwC’s and Mr Hook’s auditing of listed infrastructure and construction companies. The breaches in both Decision Notices concern failures to properly audit revenue recognised under specific complex long-term contracts.
A non-financial sanction imposed under the first Decision Notice requires PwC to conduct reviews of its audit work in recent audit engagements of listed companies, where long-term contracts are prevalent, including a review of the efficacy of initiatives introduced to seek to improve the quality of audit work in this area. PwC will report the results to the FRC over two years.”