FCA turns its attention to auditors by fining PWC and censuring Macintyre Hudson

PwC 

In a first for the FCA, a statutory auditor (PwC) has been fined £15 million for failing to comply with duties owed under the Financial Services Act 2000 (FSMA) in relation to its audit of an FCA authorised firm. That firm, LCF, has been the subject of a previous Enforcement Watch article, following the publication of the final notice against LCF itself.   

LCF entered into administration on 30 January 2019 which brought to the fore the extent of LCF's problems. LCF’s Administrators’ soon discovered "a number of highly suspicious transactions involving a small group of connected people". 

PwC was engaged as LCF's statutory auditor from 8 September 2016 to 17 October 2017.  As the statutory auditor of an FCA authorised firm, PwC was subject to duties set out in s342FSMA to communicate certain matters to a regulator. These include where the auditor reasonably believes that the firm concerned might not be satisfying the FCA's threshold conditions including for example the firm's duty to conduct its business with integrity and to establish and maintain controls for countering the risk of being used to further financial crime. 

An FCA investigation found that "LCF failed to co-operate with PwC (including by failing to provide basic information to PwC), acted aggressively towards auditors at PwC, and provided inaccurate and/or misleading information to PwC. In the context of these and other significant issues, PwC formed a reasonable belief that LCF might be (i.e. suspected that LCF was) involved in fraudulent activity." 

Concerns at PwC then led to the filing of an internal suspicious activity report (SAR), although the FCA notice does not disclose whether that then led to the filing of a SAR with the NCA.   

In the following days PwC received some further audit evidence from LCF and apparently was able to satisfy itself that it could sign off an unqualified (clean) audit opinion for the 2016 accounts. The FCA made clear that it needed to make no finding as to whether PwC no longer subjectively believed that LCF was involved in fraudulent activity, but pointed out that its obligation to report its previous reasonable belief as to fraud remained. 

MHA 

Unusually for the FCA, disciplinary action against MHA did not result in a fine, but rather a public censure.   

Auditors of relevant FCA authorised firms that hold client assets are required to submit client assets reports to the FCA in accordance with regulatory obligations set out in the handbook at SUP 3.10.4.  The auditor has to provide an opinion on the relevant firm's compliance regulations set out in the FCA client assets handbook (CASS) and report breaches to the FCA.   

The FCA reports that between 1 July 2015 and 28 May 2019 MHA failed to prepare CASS reports compliantly, in that it failed to report to the Authority a total of 25 breaches by its clients of various CASS rules. These breaches included failure to maintain acknowledgement letters from banks, failure to perform reconciliations to the appropriate standard, failure to pay client monies in a timely manner, and the co-mingling of firm and client money.  

CASS audit requirements are highly technical in nature, requiring specific experience. In the case of MHA, the FCA noted that some members of the team had limited relevant experience. 

Comment 

These are the first occasions that the FCA has used powers to discipline the statutory auditor of an FCA regulated firm and taken action against a CASS auditor. It represents an increasing trend for the FCA to take a regulatory interest in auditors following a number of high-profile financial failures (including LCF). In these present cases, it has led to action being taken by the FCA itself, however, we are aware of other cases where the FCA has referred audit firms to their accounting regulator to take further action.   

In the case of PwC, the fine by the FCA is in addition to a £4.9 million fine levied by the Financial Reporting Council (FRC) arising from the same audit. As is customary, the FCA did not take into account fines levied by other regulators in setting the penalty against PwC. Interestingly, the PwC penalty appears to follow a settlement between PwC and the FCA, but PwC did not receive the usual 30% settlement discount. Possibly this is because settlement took place after the stage 1 settlement period had ended. 

MHA can consider itself lucky to have been subject only to a public censure and not a penalty.  The factors taken into account by the FCA in deciding not to impose a fine, included: 

• the failings were not committed deliberately or recklessly, MHA took steps to comply with its legal and regulatory obligations however those steps were inadequate;