Expensive error: Failure to disclose fraudulent activity by audit clients could prove costly – Credit: Pixabay
The Financial Conduct Authority (FCA) has fined the big 4 accountant PwC £15m for failing to escalate its concerns to the watchdog over the alleged fraud and accounting irregularities at London Capital & Finance Plc (LCF).
LCF was a financial services firm which raised money by issuing minibonds to the public and lending funds to corporate entities.
PwC were appointed by LCF to act as statutory auditors for the 2015/16 annual accounts, a financial year in which LCF had issued minibonds with a face value of some £53.4m.
The audit commenced in early September 2016 and initially PwC thought the LCF audit would be low-risk due to the size of the business.
This view rapidly changed as LCF staff failed to cooperate with PwC audit staff and a senior employee with knowledge of day to day operations of the firm was behaved aggressively to the auditors.
Despite the low volume of documentation presented to PwC to substantiate the accounts, the FCA notes there were “substantial concerns about the veracity and reliability of the information provided by LCF and its involvement in potential fraud.”
During the course of the audit, this view was reinforced by accounting anomalies, e.g. payments from two corporate borrowers had originated from the same bank account which had not been disclosed to PwC.
LCF continued to be obstructive and failed to provide critical documents such as copies of bank statements and physical copies of signed facility agreements between LCF and borrowers.
The PwC audit team raised it concerns regarding the failure of LCF to provide supporting documentation to facilitate the completion of the audit with its risk management and legal departments.
Although a suspicious activity report (SAR) was completed by the audit team for onward submission to the National Crime Agency (NCA), PwC failed to escalate its concerns about possible fraud at LCF to FCA despite having “reasonable beliefs.”
The FCA’s final notice details the auditor was not required investigate the fraudulent matters to confirm whether their suspicions were conclusively established or allayed before making a report.
The regulator acknowledged “PwC was not involved in the misconduct of LCF”, it did however, have “an important role an important role in alerting the Authority to issues that may be of material significance to it.”
A PwC spokesperson said in a statement: “We have reached a settlement with the FCA to resolve an unintentional reporting breach.”
