The UK’s financial regulatory body, the Financial Reporting Council (FRC), has issued penalties totalling millions of pounds to accounting powerhouses, PwC and EY, for their auditing failures regarding London Capital & Finance, a now-defunct investment company embroiled in one of the largest retail savings scandals of late.
The FRC announced on a Tuesday that it charged PwC and EY fines of £4.9 million and £4.4 million respectively for a number of breaches during their inspections of LCF’s financial statements for 2016 and 2017. Despite this, both of the established accounting firms were given reductions from an initial £7 million due to early admissions of their shortcomings. It’s of note that this marks EY’s highest penalty from FRC, while it represents the third largest sanction for PwC prior to the discount.
Meanwhile, smaller accounting entity Oliver Clive & Co was also fined by the FRC, with a penalty of £42,000 for their audit of LCF’s accounts in 2015.
LCF was able to attract £237m from investors with the promise of 8% returns via so-called minibonds. However, its downfall in 2019 initiated criminal and regulatory probes, as well as an investigation into the Financial Conduct Authority’s supervision of the firm.
Jamie Symington, deputy executive counsel at FRC, remarked on the auditors’ failure to spot and evaluate the threats of substantial misinformation due to their lack of understanding of LCF’s operations. He stated that these breaches are made much more grave due the auditors being aware of that LCF was a growing business selling unregulated financial products to retail investors, on which they might rely on the clean audit opinions.
Notably in the 2016 audit, PwC and their audit partner Jessica Miller acknowledged eight breaches, including not showing the necessary professional scepticism regarding the risk of deceit. It was conveyed by the FRC that LCF launched bonds worth £9.2m in the year leading to April 2016, with the company experiencing significant growth when the audit report got signed.
Jessica Miller, who maintains her partnership status at PwC, received a fine of £105,000 and a severe warning. PwC refrained from commenting on whether they would be covering Miller’s fine.
PwC has expressed regret over its 2016 work tactics, admitting that they didn’t meet expected standards. The firm has since made significant overhauls to their audit methodology and policies in the past eight years, aiming to adhere to higher principles and values.
EY and its audit associate, Neil Parker, confessed to six breaches in relation to the 2017 audit for London Capital & Finance, such failures included a lack of proper comprehension of LCF’s business and internal controls. During the 2017 fiscal year, LCF released bonds worth £53 million. Consequently, Mr Parker faced a severe warning and a hefty fine of £47,250.
Besides refraining from commenting on whether it would cover Parker’s charges, EY also apologised for falling short on their 2017 auditing of London Capital & Finance. The auditing firm has taken comprehensive measures to rectify the identified errors, vowing to learn from these oversights. Additionally, the Financial Reporting Council praised EY’s remarkable cooperation during the investigation phase.
These penalties mark the continuing repercussions of the LCF scandal. In the previous year, Michael Andrew Thomson, LCF’s ex-CEO, received a 10-month suspended prison sentence due to the violation of a restraining order on his bank account, tied to a Serious Fraud Office probe.
Back in February, it emerged in the High Court, how LCF was operating a “Ponzi scheme”, where funds from investors were extravagantly spent on luxury items like diamond earrings, horses, shotguns, and club memberships at Annabel’s.
Oliver Clive & Co, which provided auditing services for LCF for one month ending April 30, 2015, owned up to 10 infractions including the failure to comply with ethical standards. The auditing firm was accused by FRC of failing to recognise and combat threats to impartiality due to the fact that it was also acting as LCF’s accountants, thus preparing its financial documents. Oliver Clive & Co was unreachable for comment about these affairs.
Copyright The Financial Times Limited 2024