PwC UK faces extended probe over Babcock audits

The UK accounting regulator has extended its investigation into PwC's UK business over its audits of Babcock International to include the defence company's accounts for 2019 and 2020.

The Financial Reporting Council said the decision to investigate the audits was made last month following Babcock's announcement of a review into contract profitability and its balance sheet.

The review resulted in about 140 adjustments totalling about £2 billion (€2.4 billion) that related to a combination of errors in previous accounts, changes in estimates and an updated accounting policy.

Britain's second biggest defence contractor had announced the review last January as part of a sweeping overhaul under new chief executive David Lockwood. The company in July revealed a £1.6 billion annual loss as it wrote down the profitability of its contracts.

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About £1.3 billion of the £2 billion charge came from write-offs in goodwill from acquisitions made by the previous management, notably the purchase of Avincis, the search and rescue helicopter group.

The sea of red ink appeared to bear out previous criticisms of the group's accounting and governance by a little-known group, Boatman Capital Research, which had consistently been rejected by Babcock's then management.

Babcock said last year it was replacing PwC as auditor with Deloitte after almost two decades. Babcock declined to comment on Monday.

PwC was already under investigation over its audits of Babcock’s financial statements for the years ended March 2017 and March 2018.

Harming the profession

The investigation comes on top of existing FRC probes into PwC UK's audits of collapsed minibond company London Capital and Finance and Wyelands Bank, the finance vehicle owned by industrialist Sanjeev Gupta.

Kevin Ellis, UK chairman and senior partner at PwC, said in December that criticism of the audit industry from politicians and regulators was harming the profession and risked making it more difficult to attract new recruits.

Retaining qualified auditors also “becomes much harder, if there’s a current of external negativity”, he said.

PwC announced record average profits of £868,000 per partner in the UK last year as it capitalised on a boom in corporate dealmaking. Its 22,000 staff were handed increased bonuses and extra time off during the coronavirus pandemic.

The firm said on Monday that it would co-operate fully with the FRC’s investigation into its audits of Babcock, one of the crucial contractors for the UK’s ministry of defence.

“Audit quality is of paramount importance and we remain committed to our ongoing programme to enhance audit quality and to the delivery of consistently high quality audits,” PwC said.

“The FRC’s annual reviews of our audit work, policies and procedures show a continued trend of improvement in our work and we use their insights, together with our own reviews, to continuously improve how we deliver high quality audits,” it added. – Copyright The Financial Times Limited 2022