PwC fined £15 million for failing to report suspected fraud at City firm
Fine is FCA’s first against an auditor and follows PwC being hit with £4.9m penalty over audit by another regulator
The UK financial services watchdog has fined PwC a record £15m after audit staff failed to tell regulators they suspected fraud at a City firm that collapsed in 2019, leaving more than 11,000 investors almost £240m out of pocket.
It marks the first Financial Conduct Authority (FCA) fine against an auditor, and comes three months after PwC was hit with a £4.9m separate penalty by the Financial Reporting Council over the handling of London Capital & Finance’s accounts.
LC&F collapsed after taking about £237m from 11,600 investors. Its mini-bonds promised stellar returns of up to 8% a year, but put only a small amount of cash into safe interest-bearing investments. The rest was funnelled into speculative property developments, oil exploration in Faroe Islands and even a helicopter bought for a company controlled by LC&F.
The collapse in January 2019 led to reprimands for the FCA and a criminal investigation by the Serious Fraud Office, which is still open. The latest fine, the largest ever imposed on PwC in the UK, draws a line under the FCA’s investigation into the affair.
The watchdog said PwC had encountered “significant issues” throughout its audit of LC&F accounts in 2016, including aggressive behaviour from a senior manager. A general lack of cooperation meant it was difficult to obtain even basic information from the firm, which instead provided inaccurate and misleading details about its operations.
Notes from an internal PwC meeting that September noted that the behaviour of LC&F staff raised questions over whether there was “something wrong” at the company.
Matters were soon escalated to senior staff within PwC, who were told the matter had become “exponentially worse”, warning that the firm might need to resign as auditor, or limit the scope of the LC&F audit “based on what is happening”.
The amount of basic information still missing from LC&F’s audit was deemed “quite extreme” and raised enough concerns to involve PwC’s risk management department. The audit team explained that the information they had requested was “very straightforward” and included “deliverables that you would expect to get on every audit”.
The risk team then described the audit as “a problematic situation with numerous concerns”, including “reluctance to provide information and a number of things that don’t feel right”. PwC staff eventually filed and internal suspicious activity report, which involved its legal department.
It ended up taking PwC six weeks to complete the audit, which was three times longer than usual. A final rush of evidence from LC&F in the final days of the audit eventually led PwC staff to sign off on the accounts. However, PwC never flagged its suspicions to the regulator.
Therese Chambers, the joint executive director of enforcement and market oversight at the FCA, said: “There were a number of red flags that led PwC to suspect fraud. They should have acted on them immediately. Their failure to do so deprived the FCA of potentially vital information.”
PwC said in a statement it had reached a settlement with the FCA to resolve the matter, which it called an “an unintentional reporting breach”.
The Financial Services Compensation Scheme (FSCS) has paid out £57.6m to eligible bondholders who lost money when LC&F collapsed. The government has also paid £115m to eligible bondholders through a one-off scheme, now closed. The work of LC&F’s administrators to recover creditors’ funds is ongoing.
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