PwC has been fined £4.55 million after a £20 million hole was found in the accounts of IT managed services provider Redcentric.
The auditor was found by the Financial Reporting Council (FRC) to have shown a “serious lack of competence in conducting the statutory audit work”.
Two individuals from PwC were also fined £200,000 each – discounted to £140,000. PwC’s fine was reduced from £6.5 million.
Claudia Mortimore, deputy executive counsel to the FRC, said: “The sanctions reflect the seriousness and extent of the breaches. Professional scepticism was lacking in this audit. Had it been applied, certain material misstatements would likely have been detected. As this is the second Final Decision Notice involving PwC Leeds’ office in recent years, we have mandated that the firm supplements its ongoing monitoring and support for that office, to further improve the quality of audit work in the future.”
The errors were investigated by both the FRC and the Financial Conduct Authority.
In a statement, PwC said: “Since the work in question was completed we have taken numerous steps to strengthen processes.”
In early November 2016, the Harrogate-based provider of IT services announced its numbers had been seriously misstated. Net assets in the year to March 2016 had been overvalued by £10 million and net debt was materially higher.
Peter Brotherton, recruited as finance director after Redcentric’s misstatements came to light, says about every line in Redcentric’s balance sheet for 2016 was wrong. Profits, cash and assets were all inflated. The previously stated pre-tax profit of £7.4 million was, in fact, a £6 million loss. Net debt was nearer £38 million, not £25 million as reported.
In its 2017 annual report, Redcentric said the errors came down to wilful misstatement and incompetence rather than theft. Accounting policies and practices were misapplied. Operating costs were capitalised, flattering profits. Cash payments made after the company’s March year-end were booked as if they had been made before the year-end. Cash paid to suppliers before the year-end was logged later. Trade debtors were artificially low. Supplier payments were delayed to boost cash flows and the net debt position.
The auditors didn’t simply compare the numbers with the cash in the bank. The banks came to the company’s rescue, and the board decided it would cost too much to look further at how far back the errors went and the scale of the restatements made it hard to “comment on comparative trading figures”.
