PwC probed over audits of UK construction contractors

PwC is being investigated by the UK Accounting Authority over its audits of Galliford Try and Kier, two of the country’s largest construction contractors, according to people with knowledge of the case.

The hitherto unknown cases are the latest in a growing list of investigations into the work of the four major auditing firms, including its audits of BT and Eddie Stobart Logistics.

The Financial Reporting Council announced in January that it was investigating PwC’s audits of the defense group Babcock over a four-year period. In the last two years, it has also opened investigations into the firm’s revisions of the collapsed minibond company London Capital and Finance and Wyelands Bank, owned by steel magnate Sanjeev Gupta.

The FRC ordered changes to Galliford Try’s accounts two years ago after overvaluing its assets by DKK 94.3 million. GBP in its accounts for June 2018.

The FRC’s investigation into PwC’s audit of Galliford Try includes the accounting treatment of long-term contracts and revenue recognition, said two of the people familiar with the matter. The auditor’s treatment of these areas at Kier is also being investigated, one of the persons added.

The regulator said in 2020 that Galliford Try should not have recognized a legal claim of £ 80m. in conjunction with the fateful Aberdeen bypass project as an asset. It also highlighted problems with the classification of certain cash flows.

BDO replaced PwC as Galliford Try’s auditor for the financial year 2020 according to rotation rules.

Kier, the UK government’s largest construction contractor, plunged into crisis in 2018 after debt-based acquisitions caused it to struggle with its balance sheet.

In 2019, just months after a rights issue that left banks suffering huge losses, Kier revealed an accounting error that wiped out millions of the stock price. PwC is still auditing the company.

If the regulator finds that PwC did not meet the required auditing standards, it has the power to reprimand the company, impose a fine and order additional staff training.

The FRC began taking a closer look at the audits after concerns were raised during its routine quality inspections, one of the people said. The exact stage of the regulator’s investigations into PwC is not known, but the person said the company would likely seek a settlement with the watchdog instead of defending any negative findings in a public court.

Any settlement is likely to involve a financial fine, which could be in the low millions of pounds in each case, the person added. It is believed that the investigation is focused on PwC and not Galliford Try or Kier.

A senior auditor at another large auditing firm said the FRC had “cracked down” on construction industry audits, which involve difficult assessments of when companies should post revenue and expenses under multi-year contracts.

The most high-profile case is the FRC’s investigation into KPMG’s revisions of Carillion. KPMG is also defending a £ 1.3bn lawsuit. from liquidators from the collapsed construction and service group, who claim that the auditors have not obtained proper evidence to justify the company recognizing profits under long-term contracts.

PwC, which paid its UK partners a record average of £ 868,000 last year, according to data provider Adviser Rankings, accounts for 104 companies on the FTSE 350 index.

PwC’s UK chairman Kevin Ellis told the Financial Times in December that criticism of politicians and regulators was hurting the profession. The group received the best score out of the four major auditing firms in the FRC’s recent quality inspections.

PwC, FRC, Galliford Try and Kier declined to comment.

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