PwC and EY fined millions over LCF audit failings

The Financial Reporting Council, the regulator of auditors, accountants and actuaries, has imposed major fines and sanctions on three audit firms over their failings over the collapse of £237m mini-bond firm London Capital & Finance (LCF) plc. The three firms sanctioned are Oliver Clive & Co Limited (OCC), Pricewaterhouse Coopers LLP (PwC) and Ernst & Young (EY). EY has been hit with a £4.41m fine by the FRC and PwC with a £4.9m fine. OCC has been fined £42,000. LCF collapsed in 2019 leaving 11,625 investors with total losses of over £237m. Many investors lost a large part of their life savings, with some of the bond investments transferred into ISAs and SIPPs in the mistaken belief it was safe. Earlier this year the Financial Conduct Authority fined Floris Jakobus Huisamen, who was responsible for compliance at LCF, £31,800. The FRC has issued Final Settlement Decision Notices under its Audit Enforcement Procedure and imposed sanctions as a result of its investigation of the audits of London Capital & Finance plc. The sanctions cover: Oliver Clive & Co Limited and audit engagement partner Emma Benjamin, in relation to the statutory audit of the financial statements of LCF for the one-month period ended 30 April 2015 PricewaterhouseCoopers LLP and audit engagement partner Jessica Miller, in relation to the statutory audit of the financial statements for the financial year ended 30 April 2016 Ernst & Young LLP and audit engagement partner Neil Parker, in relation to the statutory audit of the financial statements for the financial year ended 30 April 2017 In December 2018, the FCA imposed restrictions on LCF's ability to issue or approve further financial promotions. The FCA's intervention was prompted by serious concerns regarding LCF's conduct. The Serious Fraud Office has opened a criminal investigation in relation to suspicions that actions relating to the sale of LCF’s bonds may have been fraudulent but this question has not been decided by any court to date, the FRC said. OCC acted as LCF’s accountants and prepared the financial statements for the one-month period ended 30 April 2015, which they then audited. OCC and Emma Benjamin admitted 10 breaches of requirements in relation to their audit of the accounts, concerning compliance with ethical standards, audit planning, identifying and assessing risk of material misstatement, the auditing of loan debtors, related parties, bond creditors, opening balances, subsequent events and going concern and the quality control of the audit. The FRC said that although at an early stage LCF was a small company with a loan book of about £1.25m, a single borrower and 36 bondholders and the audit was only of one month’s financial statements rather than a full year, the breaches were still “serious.” The FRC said: “There was a failure to identify and guard against the threats to objectivity arising from the fact that OCC acted as the LCF’s accountants and had prepared the financial statements. The audit breaches included numerous contraventions of fundamental requirements affecting several key areas of the financial statements. OCC has been given a financial sanction of £60,000, discounted by 30% for admissions and early disposal to £42,000. It has also had a published statement in the form of a severe reprimand and a declaration that the April 2015 audit report signed on behalf of OCC did not satisfy the ‘Relevant Requirements’. Emma Benjamin has been fined £20,000, discounted by 30% for admissions and early disposal to £14,000, given a published statement in the form of a severe reprimand and given a declaration that the April 2015 audit report did not satisfy the Relevant Requirements. For the 2016 Audit PwC was brought in to audit the full year’s financial statements to 30 April 2016. In the course of that year LCF issued a further £9.2m in bonds and was growing even more rapidly by the time the audit report was signed, the FRC said. PwC and Jessica Miller admitted eight breaches in relation to identifying and assessing the risk of material misstatement, the exercise of professional scepticism with particular regard to the risk of fraud, and the auditing of loan debtors, prepayments, revenue, financial instrument disclosures, going concern and related party transactions. The failures included multiple contraventions of fundamental requirements affecting key areas of the financial statements. The most significant issue was the failure to obtain an adequate understanding of the nature of LCF’s business and the company’s internal controls and to apply sufficient professional scepticism. PwC resigned as LCF’s auditor in October 2017. PwC has been punished with a financial sanction of £7m, discounted by 30% for admissions and early disposal to £4.9m; a severe reprimand and a declaration that the 2016 audit report did not satisfy the Relevant Requirements. PwC must also take action to avoid a recurrence of the contravention. Jessica Miller has been fined £150,000, discounted by 30% for admissions and early disposal to £105,000; issued with a severe reprimand and given a declaration that the 2016 audit report did not satisfy the Relevant Requirements. For the 2017 Audit EY audited the financial statements for the financial year to 30 April 2017. During that year LCF issued a further £53.4m in bonds, the FRC said. EY and Neil Parker have admitted six breaches relating to identifying and assessing the risk of material misstatement, the exercise of professional scepticism with particular regard to the risk of fraud, and the auditing of loan debtors, bond creditors, going concern and related parties. The failures included, “multiple breaches of fundamental requirements” in several key areas. Again, there was a significant failure to gain a proper understanding of LCF’s business and internal controls, and to apply adequate professional scepticism, FRC said. EY has been fined £7m, discounted by 10% for mitigating factors (namely “an exceptional level of co-operation”) and by a further 30% for admissions and early disposal to £4.41m, given a severe reprimand and a declaration that the 2017 audit report did not satisfy the Relevant Requirements. Neil Parker was hit with a fine of £75,000, discounted by 10% for mitigating factors (namely an exceptional level of co-operation) and further discounted by 30% for admissions and early disposal to £47,250; a severe reprimand and a declaration that the FY2017 Audit report did not satisfy the Relevant Requirements. Jamie Symington, deputy executive counsel, said in relation to all three audits: “In each of these three audits the auditors failed to identify and assess the risks of material misstatement through understanding LCF’s business. These breaches are made considerably more serious by the fact that all of the auditors knew they were auditing an expanding business which was engaged in selling unregulated financial products to retail investors, and that potential investors might place reliance on the clean audit opinions.” The FRC said that all of the auditors co-operated with Executive Counsel’s investigation. None was found to have acted “dishonestly or recklessly”. The FRC said that EY and Neil Parker gave an exceptional level of co-operation worthy of being treated as a mitigating factor. EY proactively carried out its own Root Cause Analysis in respect of the audit failings and provided a copy to Executive Counsel on an open basis.

PwC and EY fined millions over LCF audit failings

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