PwC and two partners fined more than £4.5m for ‘numerous’ audit breaches of Harrogate firm

PwC and two of its audit partners have been fined more than £4.5m for ‘numerous’ accounting breaches relating to the audits of Harrogate-headquartered managed IT services firm Redcentric.

The Financial Reporting Council (FRC) has this morning issued a Final Decision Notice and imposed a £4.5m fine on PwC and a £140,000 fine each on audit partners Jaskamal Sarai and Arif Ahmad. The breaches relate to the auditing of Redcentric’s accounts for the financial years ending 31 March 2015 and 31 March 2016.

The FRC this morning said: “The breaches of Relevant Requirements were numerous and in certain cases were of a basic and/or fundamental nature, evidencing a serious lack of competence in conducting the statutory audit work. A number of the breaches relate to the auditors’ failure to exercise professional scepticism, which is at the heart of auditors’ work.”

PwC will receive a £4.5m fine, discounted from £6.5m for admissions and early disposal. The FRC said it was would also monitor and support the Leeds audit practice as it was the second time the  office had been issued an audit notice in recent years. In June last year, the Big Four firm was hit with a £10m fine for BHS audit failings.

Sarai will be fined £140,000 – discounted from £200,000 for admissions and early resolution – for the accounting issues in 2015.

Arif Ahmad

Ahmad, the former head of the Leeds PwC office, will also be fined £140,000 – discounted from £200,000 for admissions and early resolution – for the accounting issues in 2016.

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, it is likely that certain material misstatements would 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 FRC added: “In addition, training has been undertaken by Mr Sarai and Mr Ahmad in relation to compliance with the requirements of ISA 220, as it relates to supervision of the engagement team and the application of professional scepticism in accordance with ISA 200.”

The financial misstatements at Redcentric were first revealed in November 2016. The chief financial officer, Tim Coleman, left the business shortly afterwards.

It was first announced that an investigation into the Redcentric accounts would take place in 2017, when the Financial Conduct Authority launched an investigation into historic overstatements in Redcentric’s accounts relating to assets and pre-tax profits being overstated by around £20.8m. The FRC then launched its disciplinary investigation in July 2017.

There was then a major restructure of the senior management team at Redcentric, which saw improved results after implementing a turnaround plan. But in November 2018 the CEO left after a disappointing set of half-year results and the then CFO, Peter Brotherton, was made interim CEO.

Just last month, Redcentric appointed a new CFO and appointed Brotherton as the permanent CEO. Dean Barber will become Chief Financial Officer with effect from 1 September 2019. Since April 2013 Barber has been Group Financial Controller at Leeds-headquartered EMIS Group. He has 20 years’ experience in finance, with senior finance positions held at Skanska UK, WM Morrison Supermarkets and Jarvis. He is a chartered accountant, having trained and qualified at PwC.

At the time of the board change announcements, Chris Cole, Chairman, said: “I am pleased to welcome Dean to Redcentric on behalf of the Board. Dean’s experience and skills will be of great benefit to the Company and we look forward to working with him.  I would also like to congratulate Peter on his appointment as CEO on behalf of the Board and thank him for his contribution since he assumed Chief Executive responsibilities and previously as Chief Financial Officer.”

The firm will  publish it latest full-year results in June.

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