Sanctions Against Three Audit Firms

The Executive Council of the Financial Reporting Council (FRC) has issued Final Settlement Decision Notices and imposed sanctions against three audit firms in relation to audits of London Capital & Finance Plc.

Background

London Capital & Finance Plc’s business was that of issuing private bonds to retail investors and lending the proceeds to commercial clients. The business went through a period of explosive growth between 2015 and 2018, growing from a small company to a large business. In December 2018, the FCA intervened due to concerns over the conduct of its business, and London Capital & Finance Plc subsequently went into administration in January owing c.£237m to bondholders. Subsequently the Serious Fraud Office opened an investigation in relation to suspicions that the sale of the bonds may have been fraudulent.

The audits of the financial statements of London Capital & Finance Plc subsequently came under scrutiny for the years 2015, 2016 and 2017 – each of which was audited by a different firm. All three of these audits were found to be deficient with each audit failing to provide the reasonable assurance required of a statutory audit.

The Failings

Failings identified in the 2015 audit conducted by Oliver Clive & Co were extensive and included:

· Non-compliance with ethical standards – a failure to identify and guard against threats to objectivity arising from acting as accounts and preparing the financial statements, as well as being the auditor.

· Lack of planning and appropriate risk assessment.

· Lack of appropriate audit work over loan debtors, related parties, bond creditors, opening balances, subsequent events and going concern.

· Issues with the quality control of the audit.

Failings identified in the 2016 audit conducted by PwC were also extensive and included:

· Lack of understanding of the nature of the entity’s business and internal controls.

· Lack of professional scepticism.

· Lack of appropriate risk assessment.

· Lack of appropriate audit work over fraud, loan debtors, prepayments, revenue, financial instrument disclosures, going concern and related party transactions.

Failings identified in the 2017 audit conducted by EY included:

· Lack of understanding of the business and internal controls.

· Lack of professional scepticism.

· Lack of appropriate audit evidence over loan debtors, bond creditors, going concern and related parties.

Lessons

Whilst the audits in question are now a little dated, the deficiencies identified are still relevant to audits being undertaken under current versions of the applicable standards.

In particular, firms should be aware of the importance of the need to apply professional scepticism throughout the audit, and may benefit from reading the FRC’s guidance on What Makes a Good Environment for Auditor Scepticism and Challenge.

Additionally, firms should not underestimate the amount of time and the seniority of staff required to undertake effective audit planning. Planning is a fundamental part of an audit, and over recent years has become even more critical with revisions to ISA 315, for example.

Where there is any doubt regarding the sufficiency or appropriateness of audit evidence, firms should consult, internally and/or externally as appropriate – guidance on consultation should be contained within the firm’s quality management

How Can Mercia Help?

Mercia offers a range of audit and specialist assignment methodologies to aid firms in compliance with the requirements of the International Standards on Auditing (ISAs). Additionally we are on hand to offer technical assistance by way of file reviews (whether hot or cold) and answering your technical queries. Our extensive range of training courses may also be of benefit.