Three firms, including PwC and Ernst & Young (EY), have been handed multimillion-pound fines by the accounting watchdog for their audits of London Capital & Finance (LCF), a minibonds firm which took money from almost 12,000 investors before collapsing in 2019.
The executive counsel of the Financial Reporting Council (FRC) said PwC had agreed to a £4.9m settlement tied to failures over its audit of LCF’s 2016 financial statements. The punishment was discounted from £7m for “admissions and early disposal”.
One of PwC’s auditors, Jessica Miller, was also given a £105,000 sanction. The FRC said the most significant issue was PwC’s “failure to obtain an adequate understanding of the nature of LCF’s business and the company’s internal controls, and to apply sufficient professional skepticism in that regard”. The firm resigned as LCF’s auditor in October 2017.
EY, which audited LCF’s final 2017 accounts, agreed to a £4.4m penalty – again discounted from £7m. Auditor Neil Parker was fined £47,250.
The watchdog noted “a significant failure to gain a proper understanding of LCF’s business and internal controls and to apply adequate professional scepticism”.
A smaller firm, Oliver Clive & Co (OCC), was handed a £42,000 penalty and £14,000 fine for auditor Emma Benjamin. The firm was responsible for auditing LCF’s 2015 statements.
The watchdog said OCC failed “to identify and guard against the threats to objectivity arising from the fact that OCC acted as the LCF’s accountants and had prepared the financial statements”.
LCF sold 16,706 bonds to 11,625 bondholders, raising £237m from investors who were promised eight per cent returns a year.
Its failure in 2019 caused a scandal, leading to several investigations including by the Treasury and the Financial Reporting Council. The Serious Fraud Office also launched a criminal investigation into the individuals associated with LCF, which is still ongoing.
A court heard earlier this year that LCF was a “Ponzi” scheme where investors’ money was spent on luxury items and a nightclub membership.
All three accounting firms were hit with a “severe reprimand” on Tuesday. Jamie Symington, the FRC’s deputy executive counsel, said: “In each of these three audits the auditors failed to identify and assess the risks of material misstatement through understanding LCF’s business.
“These breaches are made considerably more serious by the fact that all of the auditors knew they were auditing an expanding business which was engaged in selling unregulated financial products to retail investors, and that potential investors might place reliance on the clean audit opinions.”
A PwC spokesperson commented: “We are sorry our work in 2016 did not meet the standards expected and that we expect of ourselves. In the eight years since this work took place, we have made significant changes to our audit methodology, policies and guidance.”
An EY spokesperson said: “Our 2017 audit of London Capital & Finance fell short of our standards and for this we apologise. We have taken significant steps to address the issues identified and we are committed to learning from our mistakes.”
City A.M. approached OCC for comment.