PwC fined £5.1m for ‘extensive misconduct’ over RSM Tenon audit

PwC has been fined a record £5.1m by the UK’s accounting watchdog for “extensive misconduct” relating to the audit of RSM Tenon, a professional services firm put into administration in 2013.

The UK Financial Reporting Council said it had issued PwC with a “severe reprimand” and an initial penalty of £6m, which was reduced to a £5.1m following a settlement discount. The fine is the largest ever issued by the FRC. The firm will pay an additional £500,000 towards the FRC’s investigation costs.

The watchdog also imposed a fine of £114,750 on Nicholas Boden, the PwC audit engagement partner for RSM Tenon, in relation to the collapsed group, which was forced to restate its 2011 accounts after discovering “significant errors”.

PwC and Mr Broden admitted to five separate instances of misconduct in their 2011 audit of RSM Tenon, the FRC said. These include accounting for the cost of employee bonuses, determining amounts recoverable on contracts, accounting for a lease and the calculation of goodwill of a subsidiary.

Rectifying the errors cut RSM Tenon’s 2001 pre-tax profits by £12.1m.

The accountancy firm, which was once the UK’s tenth-biggest auditor by income fee, was later put into administration and sold to rival Baker Tilly.

“The admitted acts of misconduct [by PwC] include failures to obtain sufficient appropriate audit evidence and failures to exercise sufficient professional scepticism,” the FRC said yesterday.

The ruling is the latest in a string of actions taken by the FRC against the professional services group and its Big Four rivals as the watchdog flexes its muscles in an attempt to drive up audit quality.

In May, the FRC fined PwC £5m for misconduct relating to its audit of social housing group Connaught. So far this year, the FRC has also launched investigations into the audit of UK companies including Rolls-Royce, BT and Mitie — which involve KPMG, PwC and Deloitte respectively.

PwC has also suffered regulatory setbacks outside of Britain. Earlier this month, the US watchdog slapped the firm with a $1m fine over a compliance failure relating to an audit of Merril Lynch.

The group also had its bank audit licence pulled in Ukraine by the country’s central bank after it allegedly failed to detect a $5.5bn balance-sheet hole at PrivatBank, Ukraine’s largest lender.

RSM Tenon was listed in London — unusual for professional services firms, which tend to operate as partnerships. The deal did not benefit its shareholders, who had already been warned that their shares were probably worthless.

Its undoing was in part down to its purchase of RSM Bentley Jennison as well as assets from Vantis in 2009 and 2010, as it struggled to make dealmaking pay and built up heavy debts, and to the accounting errors it later made in 2011.

“We are sorry that aspects of the audit carried out in 2011 fell short of professional standards. We cooperated fully with the FRC during its lengthy investigation and accept its findings,” PwC said yesterday. "We continually review and update our audit processes in response to both internal reviews and external inspection findings. Audit quality is of paramount importance and our annual Audit Quality Reviews show year-onyear improvements,” it added.

Proceedings against RSM Tenon’s former finance director, Russell McBurnie, were still ongoing, the FRC said.