Sanctions against PricewaterhouseCoopers LLP and audit partner (in relation to PwC’s audit of Kier)
News types: Inspection, Investigations, Publications, Statements
Published: 7 June 2022
The Executive Counsel of the Financial Reporting Council (the FRC ) has issued a Final 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 audit of the financial statements of Kier Group plc (the Company ), for the financial year ended 30 June 2017 (the Audit ).
The following sanctions have been imposed:
PwC:
- A financial sanction of £3.35 million, adjusted for aggravating/mitigating factors and admissions/early disposal to £1,959,750;
- Non-financial sanctions, comprising:
- a requirement to evaluate and report to the FRC on certain audits conducted in 2022-2023 which feature long-term contacts and the impact of remedial actions put in place;
- a Severe Reprimand; and
- a declaration that the Audit Report did not satisfy the Relevant Requirements.
Mr Hook:
- A financial sanction of £90,000 adjusted for mitigating factors and admissions/early disposal to £52,650;
- Non-financial sanctions, comprising:
- a Severe Reprimand; and
- a declaration that the Audit Report did not satisfy the Relevant Requirements.
PwC and Mr Hook have each admitted breaches of Relevant Requirements in relation to the audit of long-term contracts within the Company’s Construction division.
Long-term contracts accounted for the majority of the Construction division’s revenue. Contract accounting was identified as a significant risk during the planning of the Audit and was a Key Audit Matter in the Auditor’s Report. Despite this, when performing audit work on four contracts, the Respondents failed to obtain sufficient appropriate audit evidence; perform adequate testing or carry out substantive procedures on the Company’s accounting estimates; prepare sufficient audit documentation to support conclusions reached and carry out the audit with sufficient professional scepticism. However, these errors did not cause the 2017 financial statements to be misstated.
Separately, the Respondents failed to identify and correct errors in the Company’s income and cash flow statements relating to the presentation of gains on corporate disposals completed in the 2017 financial year. This error did cause the 2017 financial statements to be misstated. However, the Company’s underlying results were unaffected by the restatement in the 2018 financial statements.
The Executive Counsel does not assert that the breaches were intentional, dishonest or reckless and has taken into account that, since the Audit, PwC has introduced a number of measures designed to improve the quality of audit work on long-term contracts.
PwC and Mr Hook provided a good 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:
“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. 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. This is vital so that investors can have confidence in the financial statements.
The Respondents have accepted that there were deficiencies in the work performed on long-term contracts in this Audit. In the intervening years, PwC has introduced a number of initiatives aimed at improving the quality of audit work in this area. In addition to the financial sanctions, the non-financial sanctions require PwC to review long-term contract audit work in subsequent audit engagements and to report to the FRC as to the efficacy of the initiatives it has introduced.”