“Big four” accountancy firms PricewaterhouseCoopers and EY have been fined a combined £9.3m for a series of failures in auditing the accounts of London Capital & Finance, the collapsed mini-bond firm that wiped out the investments of thousands of savers.
It concludes a near four-year investigation by the Financial Reporting Council (FRC) into how auditors breached their duties while reviewing the firm’s finances in the years leading up to its demise in 2019.
Jamie Symington, the regulator’s deputy executive counsel, said the auditors failed to understand the business and raised the possibility that there could be “material misstatements” in the company’s accounts.
“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,” Symington said.
London Capital & Finance (LC&F) collapsed in 2019, after taking about £237m from 11,600 investors. Its mini-bonds promised stellar returns of up to 8% a year, but put only a small amount of cash into safe interest-bearing investments.
The rest was funnelled into speculative property developments, oil exploration in the Faroe Islands and even a helicopter bought for a company controlled by LC&F. The company collapsed in January 2019. The scandal has led to reprimands for the City regulator, the Financial Conduct Authority, and prompted a criminal investigation by the Serious Fraud Office, which is still open.
PricewaterhouseCoopers (PwC) and one of its staff members – who were appointed as auditors for the 2016 financial year – admitted to eight breaches, the most serious being a failure to adequately understand the nature of LC&F’s business and internal controls.
That year, the firm issued £9.2m in bonds and was growing even more rapidly by the time the audit report was signed, the regulator said. However, PwC did not apply “sufficient professional scepticism” while conducting its audit, the FRC said.
EY took over as LC&F’s auditor for the 2017 financial year, after PwC resigned. That year, LC&F ramped up its operations, selling a further £53.4m in bonds. But EY fell short, having also failed to understand and properly scrutinise the business, particularly in light of the risk of fraud. EY and one of its employees has since admitted to six breaches of FRC rules.
PwC and EY have been severely reprimanded for their failings and hit with fines worth £4.9m and £4.4m respectively. It marks the largest-ever fine issued against EY by the FRC to date, and the third largest for PwC.
A smaller auditor, Oliver Clive & Co, was fined a further £42,000 in relation to LC&F’s 2015 audit. All three firms cooperated with the regulator, resulting in reduced fines.
“We are sorry our work in 2016 did not meet the standards expected and that we expect of ourselves,” a PwC spokesperson said, adding that the firm had made “significant changes” to its processes and policies over the past eight years.
EY said in a statement that it had fully cooperated with the FRC throughout the investigation. “Our 2017 audit of LC&F 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.”
Oliver Clive & Co was contacted for comment.