UK Financial Reporting Council Fines 3 Audit Firms PwC, EY and Oliver Clive & Co $11.8 Million for Audit Failures with 11,625 Investors Losing $296 Million in Private Bonds Sold by Collapsed of London Capital & Finance in 2019, PwC Fined £4.9 Million, EY Fined £4.4 Million & Oliver Clive & Co Fined £42,000
9th May 2024 | Hong Kong
The UK Financial Reporting Council has fined 3 audit firms PwC, EY and Oliver Clive & Co $11.8 million (£9.5 million) for audit failures with 11,625 investors losing $296 million (£237 million) in private bonds sold (lent to commercial clients) by collapsed London Capital & Finance (2019). PwC is fined £4.9 million, EY is fined £4.4 million & Oliver Clive & Co is fined £42,000. UK Financial Reporting Council (7/5/24): “LCF was formerly known as London Capital & Finance Limited and re-registered as a Public Limited Company on 11 November 2015, changing its name accordingly. It was not listed on any stock exchange. The company’s business involved issuing private bonds to retail investors and lending the proceeds to commercial clients. In December 2018, the Financial Conduct Authority (“FCA”) imposed restrictions on LCF’s ability to issue or approve further financial promotions. The FCA’s intervention was prompted by serious concerns regarding LCF’s conduct. LCF went into administration on 30 January 2019, owing about £237m to 11,625 individual bondholders. The Serious Fraud Office has opened a criminal investigation in relation to suspicions that actions relating to the sale of LCF’s bonds may have been fraudulent, but this question has not been decided by any court to date.”
“ UK Financial Reporting Council Fines 3 Audit Firms PwC, EY and Oliver Clive & Co $11.8 Million for Audit Failures with 11,625 Investors Losing $296 Million in Private Bonds Sold by Collapsed of London Capital & Finance in 2019, PwC Fined £4.9 Million, EY Fined £4.4 Million & Oliver Clive & Co Fined £42,000 “
Jamie Symington, UK Financial Reporting Council Deputy Executive Counsel: “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.”
UK Financial Reporting Council Fines 3 Audit Firms PwC, EY and Oliver Clive & Co $11.8 Million for Audit Failures with 11,625 Investors Losing $296 Million in Private Bonds Sold by Collapsed of London Capital & Finance in 2019, PwC Fined £4.9 Million, EY Fined £4.4 Million & Oliver Clive & Co Fined £42,000
7th May 2024 – The Executive Counsel of the Financial Reporting Council (“FRC”) has issued Final Settlement Decision Notices under the Audit Enforcement Procedure and imposed sanctions against the following, as a result of her investigation of the audits of London Capital & Finance plc (“LCF”):
The Executive Counsel of the Financial Reporting Council (“FRC”) has issued Final Settlement Decision Notices under the Audit Enforcement Procedure and imposed sanctions against the following, as a result of her investigation of the audits of London Capital & Finance plc (“LCF”):
(1) Oliver Clive & Co Limited (“OCC”) and audit engagement partner Emma Benjamin, in relation to the statutory audit of the financial statements for the one-month period ended 30 April 2015 (“the 2015 Audit”);
(2) PricewaterhouseCoopers LLP (“PwC”) and audit engagement partner Jessica Miller, in relation to the statutory audit of the financial statements for the financial year ended 30 April 2016 (“the 2016 Audit”); and
(3) Ernst & Young LLP (“EY”) and audit engagement partner Neil Parker, in relation to the statutory audit of the financial statements for the financial year ended 30 April 2017 (“the 2017 Audit”).
LCF was formerly known as London Capital & Finance Limited and re-registered as a Public Limited Company on 11 November 2015, changing its name accordingly. It was not listed on any stock exchange. The company’s business involved issuing private bonds to retail investors and lending the proceeds to commercial clients. In December 2018, the Financial Conduct Authority (“FCA”) imposed restrictions on LCF’s ability to issue or approve further financial promotions. The FCA’s intervention was prompted by serious concerns regarding LCF’s conduct. LCF went into administration on 30 January 2019, owing about £237m to 11,625 individual bondholders. The Serious Fraud Office has opened a criminal investigation in relation to suspicions that actions relating to the sale of LCF’s bonds may have been fraudulent, but this question has not been decided by any court to date.
The 2015 Audit
OCC acted as LCF’s accountants and prepared the financial statements for the one-month period ended 30 April 2015, which they then audited.
OCC and Emma Benjamin have admitted ten breaches of Relevant Requirements in relation to their audit of those accounts, concerning compliance with ethical standards, audit planning, identifying and assessing risk of material misstatement, the auditing of loan debtors, related parties, bond creditors, opening balances, subsequent events and going concern, and the quality control of the audit.
Although at that stage LCF was a small company with a loan book of about £1.25m, a single borrower and 36 bondholders, and the audit was only of one month’s financial statements rather than a full year, the breaches were still serious. There was a failure 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. The audit breaches included numerous contraventions of fundamental requirements affecting several key areas of the financial statements.
The following sanctions have been imposed in relation to the 2015 Audit:
OCC:
- A financial sanction of £60,000, discounted by 30% for admissions and early disposal to £42,000;
- A published statement in the form of a severe reprimand; and
- A declaration that the April 2015 audit report signed on behalf of OCC did not satisfy the Relevant Requirements.
Emma Benjamin:
- A financial sanction of £20,000, discounted by 30% for admissions and early disposal to £14,000;
- A published statement in the form of a severe reprimand; and
- A declaration that the April 2015 audit report did not satisfy the Relevant Requirements.
The 2016 Audit
PwC was brought in to audit the full year’s financial statements to 30 April 2016. In the course of that year LCF issued a further £9.2m in bonds and was growing even more rapidly by the time the audit report was signed.
PwC and Jessica Miller have admitted eight breaches in relation to identifying and assessing the risk of material misstatement, the exercise of professional skepticism with particular regard to the risk of fraud, and the auditing of loan debtors, prepayments, revenue, financial instrument disclosures, going concern and related party transactions.
The failures included multiple contraventions of fundamental requirements affecting key areas of the financial statements. The most significant issue was the 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. PwC resigned as LCF’s auditor in October 2017.
The following sanctions have been imposed in relation to the 2016 Audit:
PwC:
- A financial sanction of £7,000,000, discounted by 30% for admissions and early disposal to £4,900,000;
- A published statement in the form of a severe reprimand;
- A declaration that the 2016 audit report did not satisfy the Relevant Requirements; and
- An order requiring PwC to take specified action designed to prevent the recurrence of the contravention, namely to: (1) report to the FRC on the root causes of the breaches, the measures already taken to address the root causes and the effectiveness of those measures, and any further measures that could be taken to prevent a recurrence; and (2) to implement and assess the effectiveness of such further measures, as agreed with the FRC.
Jessica Miller:
- A financial sanction of £150,000, discounted by 30% for admissions and early disposal to £105,000;
- A published statement in the form of a severe reprimand;
- A declaration that the 2016 audit report did not satisfy the Relevant Requirements.
The 2017 Audit
EY audited the financial statements for the financial year to 30 April 2017. During that year LCF issued a further £53.4m in bonds.
EY and Neil Parker have admitted six breaches relating to identifying and assessing the risk of material misstatement, the exercise of professional skepticism with particular regard to the risk of fraud, and the auditing of loan debtors, bond creditors, going concern and related parties.
The failures included multiple breaches of fundamental requirements in several key areas. Again, there was a significant failure to gain a proper understanding of LCF’s business and internal controls, and to apply adequate professional skepticism.
The following sanctions were imposed in relation to the 2017 Audit:
EY:
- A financial sanction of £7,000,000, discounted by 10% for mitigating factors (namely an exceptional level of co-operation) and by a further 30% for admissions and early disposal to £4,410,000;
- A published statement in the form of a severe reprimand;
- A declaration that the 2017 audit report did not satisfy the Relevant Requirements; and
- An order requiring EY to take specified action designed to prevent the recurrence of the contravention, namely to: (1) report to the FRC on the measures already taken to address the root causes of the breaches and make proposals for the assessment of the effectiveness of those measures; and (2) assess the effectiveness of the measures as agreed with the FRC, report to the FRC on their effectiveness, and either suggest further measures that could be taken to prevent a recurrence or explain why none are needed.
Neil Parker:
- A financial sanction of £75,000, discounted by 10% for mitigating factors (namely an exceptional level of co-operation) and further discounted by 30% for admissions and early disposal to £47,250;
- A published statement in the form of a severe reprimand; and
- A declaration that the FY2017 Audit report did not satisfy the Relevant Requirements.
LCF went into administration just under a year after the 2017 Audit report had been signed (in February 2018). It was in that period that a significant proportion of the unpaid bonds were issued. While it is not asserted that any of the auditors would necessarily have detected the underlying issues with the company if the breaches had not occurred, all failed to provide the reasonable assurance that the financial statements taken as a whole are free from material misstatement, whether caused by fraud or error which is the objective of any statutory audit.
The sanctions imposed take account of a number of factors, including the seriousness of the breaches and the financial strength of the auditor, as indicated by the turnover of the firm.
All of the auditors co-operated with Executive Counsel’s investigation. None was found to have acted dishonestly or recklessly. EY and Neil Parker gave an exceptional level of co-operation worthy of being treated as a mitigating factor. EY proactively carried out its own Root Cause Analysis in respect of the audit failings and provided a copy to Executive Counsel on an open basis.
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