Accounting giants PwC and Ernst & Young have been hit with multimillion-pound fines by the sector’s watchdog over their audits of failed minibonds firm London Capital and Finance (LCF).
LCF collapsed in early 2019 after it was unable to meet the payments it had promised to bondholders on high-risk, unregulated investments, owing around £237 million to nearly 12,000 people, many of them elderly.
The Financial Reporting Council (FRC) said PwC has agreed to a £4.9 million penalty, reduced from £7 million for early settlement, for failures over its audit of the 2016 financial statements of London Capital & Finance.
PwC audit engagement partner Jessica Miller was also given a £105,000 financial sanction.
PwC and Miller admitted eight breaches, with the most significant being a “failure to obtain an adequate understanding of the nature of LCF’s business and the company’s internal controls, and to apply sufficient professional scepticism in that regard”, according to the FRC.
Ernst & Young (EY), which was responsible for auditing LC&F’s 2017 accounts, the last before it collapsed, has been fined £4.4 million, with its audit engagement partner Neil Parker paying a £47,250 sanction.
The FRC said EY and Mr Parker admitted six breaches, with failures including “multiple breaches of fundamental requirements in several key areas”.
“Again, there was a significant failure to gain a proper understanding of LCF’s business,” said the FRC.
Both the EY penalties were also reduced, from an initial £7 million and £75,000 respectively, with the FRC adding that PwC and Mr Parker “gave an exceptional level of co-operation worthy of being treated as a mitigating factor”.
A third, smaller firm, Oliver Clive & Co, which had audited LC&F’s 2015 statements, has been sanctioned with a £42,000 penalty and a £14,000 financial sanction for its auditor Emma Benjamin.
These were reduced from £60,000 and £20,000 respectively.
Jamie Symington, deputy executive counsel at the Financial Reporting Council, 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.”
LCF promised high returns on investments in its bonds.
It said the funds raised, around £237 million at the time of its collapse, were being invested on bondholders’ behalf.
However, after it collapsed, around 11,600 people, many of them saving for retirement or already retired, were unable to get their money back.
Some were able to get payments from the Financial Services Compensation Scheme (FSCS), but most were not eligible, causing the Government to step in with a special fund to bail out the savers.
The Financial Conduct Authority (FCA) said last October after its own probe into the scandal that LCF’s promotions “presented a misleading picture” which made its bonds “appear a far more attractive investment than they were”.
Bondholders were not told about hidden charges, and the high risk involved, the FCA said.
The FCA said LCF also used investors’ money to fund “seemingly independent comparison websites” which showed its bonds next to other investments with lower rates of return.
The Serious Fraud Office is currently investigating whether to bring fraud charges against those who ran LCF.
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