La Financial Conduct Authority (FCA) issued a fine unprecedented 15 million pounds a PwC, in response to serious shortcomings in supervision of London Capital & Finance (LCF). This is a major blow to one of the audit giants and marks a pivotal moment in UK financial regulation.
The fine imposed on PwC is not only the largest ever recorded for the company in the UK, but far exceeds the previous record of £6,5 million received in 2018 for deficiencies in Bhs audit. With this sanction, the authority has sent a loud and clear message: audit firms must be diligent and ready to report any suspicion of fraud, to ensure transparency and trust in the financial markets.
The dramatic London Capital & Finance case
Lcf promised high returns through its “minibonds,” attracting nearly 12 investors. When the company is failed in 2019, investors lost £237m. Although the FCA regulated the company, it was not responsible for directly overseeing the products, and its actions have come under criticism for its handling of the entire affair.
The case has been described as a "Ponzi scheme", with the funds raised spent on luxury goods and personal expenses, including diamond earrings, horses and memberships to exclusive London nightclubs. The former CEO of the English group, Michael Andrew Thomson, Was condemned to a 10-month suspended prison sentence for breaching a restriction order on his bank account, as part of an ongoing investigation by the Serious Fraud Office.
The reasons for the fine
La fine the audit firm was fined for failing to promptly report suspicions of fraud regarding London Capital & Finance to the FCA. During the audit 2016 report from British investment firm PwC found significant issues, including aggressive behavior by an LCF executive and the company's provision of inaccurate and misleading information.
The consultancy team found the audit of LCF particularly complex, taking longer than expected to complete. Despite these obstacles and signals of alert, PwC did not promptly inform the regulator of suspected fraud. This was considered a serious breach of its regulatory obligations.
Ultimately, the audit firm was convinced that the English company's 2016 accounts were accurate, but it still had an obligation to report its concerns to Consob's British correspondent. Failure to report led to a £15 million fine.
The FCA's comment and PwC's response
Therese Chambers, joint executive director of the FCA, highlighted the importance of auditor accountability: “Auditors have a vital role in ensuring clean and transparent markets. They are required by law to report any suspicion of fraud. PwC ignored crucial warning signals, thus depriving the FCA of essential information.”
In response to the fine, the audit firm said it had reached a agreement with the Financial Conduct Authority to resolve an “inadvertent violation” in reporting. This means that PwC acknowledges that it made a mistake in not reporting suspected fraud, but maintains that this failure was not due to willful negligence or bad faith.
The FCA recognized that PwC she was not directly involved into the UK investment firm's misconduct, but rather that it had failed to adequately comply with its reporting obligations. This agreement reflects an attempt to resolve the issue without attributing negative intentionality to the error, but nevertheless highlights the responsibility of the auditing company.