Britain’s financial regulator fined audit firm PwC £15-million ($19.3-million) on Friday for failing to alert the watchdog that London Capital & Finance (LCF) might be involved in fraudulent activity ahead of its costly collapse for taxpayers.
The fine throws a spotlight on the longstanding debate about how far auditors should be responsible for spotting and flagging potential fraud.
PwC, one of the world’s “Big Four” auditors, encountered “significant issues” through its 2016 audit of LCF, the investment firm that collapsed in early 2019, the Financial Conduct Authority said on Friday.
It left investors facing losses on unregulated ‘mini bonds’ they had bought from LCF, with Britain’s taxpayers having to pay about £120-million to compensate them.
The FCA, which in February banned and fined a former director of LCF, said that a senior individual at LCF “acted aggressively towards auditors”, and the firm provided PwC with “inaccurate and misleading information”.
“LCF’s actions, and PwC’s own work on the audit, led PwC to suspect that LCF might be involved in fraudulent activity. PwC was duty bound to report those suspicions to the FCA as soon as possible, but they failed to do so,” the watchdog said in a statement.
PwC said the FCA has acknowledged that the auditor was not involved in the misconduct at LCF.
“We have reached a settlement with the FCA to resolve an unintentional reporting breach,” PwC said in a statement.
LCF’s collapse led to a damning independent review of the FCA, resulting in an internal shake-up at the watchdog.
Britain’s accounting watchdog, the Financial Reporting Council, has sanctioned fined PwC, along with EY and Oliver Clive & Co following its investigation into the audits of LCF.
The Serious Fraud Office has an open criminal investigation into the failures at LCF.
Following accounting scandals at retailer BHS and builder Carillion, one review said the “gap” between public expectations about auditors’ ability to detect fraud and their responsibility to do so, needed addressing.
The FCA said PwC was not responsible for “seeking out or fully investigating” suspected fraud, but auditors’ “unique insight” into companies means they have an important role in alerting watchdogs.