Ritika Janiya
Giant accounting firm PwC has been fined £15 million by the Financial Conduct Authority (FCA) for failure to report suspected fraud at London Capital & Finance. This is the first such penalty ever imposed on an auditing firm.
In a dramatic twist of irony, a record £15 million has been slapped on global accounting giant PricewaterhouseCoopers. According to the UK financial watchdog, the Financial Conduct Authority, this is the first fine that has been levied on PricewaterhouseCoopers audit arm. But why is PricewaterhouseCoopers in trouble?
The FCA alleges that PwC did not heed several clear warning signs while conducting their audit of London Capital & Finance (LCF), which later went out of business. Despite the discoveries, five months after the auditor’s report had been stopped, suspicions raised were seen. As part of its auditing process, PwC was mandated to be on the lookout to ensure that LCF’s finances were above board with the right figures. However, within the audit, some major problems were unearthed. LCF gave out wrong information, and one of its senior employees was not very nice to the auditors. However, PwC failed to report these concerns to the FCA.
You probably are going, “Yeah, but why would this concern me?” Well, it’s because when an auditor such as PwC smells something rotten that a company is doing wrong and they’re supposed to report it to the FCA, the FCA said it was furiously important that PwC should act with speed to let them know what was happening. But it didn’t. PwC went on to approve LCF’s financial accounts even though they knew of the problems.
The FCA was disappointed because PwC’s delay meant the FCA missed vital information; if PwC had reported the problem earlier, the FCA might have acted in time to prevent some of the damage.
The firm in question, LCF, is now being called a Ponzi scheme by its former investors. It is a kind of fraud in which the investments from new investors are used to pay off earlier investors instead of being used as promised. The FCA also added that LCF had misled people about the risks attached to a type of financial product known as minibonds, the purport of which is to help people get back money but which a number of people were not aware carried high risk.
In 2019, the FCA ordered LCF to stop advertising mini-bonds. This led to the unfortunate situation where LCF went into administration—officially declared incapable of paying off its debts. Thousands of people who invested with LCF ended up losing their money since they were not properly advised about the risks involved.
The big deal about the FCA fine is that this is the first time such a penalty has ever been levied against an audit firm like PwC. Audit firms previously had not been fined. The fine handed down to PwC is indicative of signs the FCA may be getting serious with the need to show companies they will be held to task for their errors—most significantly when it involves reporting fraud.
The PwC has already responded to the fine by saying that they have settled the issue with FCA. They explained that the reporting breach was not meant to be made. They did not mean to tell the lie, but still, they ended up receiving a hefty fine.
So, just what does that mean for other companies and their auditors? It distinctly sends a message: when you are an auditor and you suspect fraud, report it without delay. The FCA is watching and will take action if any false steps are made.
In a nutshell, this is the fine that FCA slapped on PwC, the first-ever to an audit firm. Something was really off about some of the major indicators where PwC missed, and fraud from LCF should have been reported. This mistake spelled massive trouble for many investors but set a new precedent on dealing with audit firms.
