PwC probed over audits of UK construction contractors

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

The previously undisclosed cases are the latest in a growing list of probes into the Big Four accounting firm’s work, including its audits of BT and Eddie Stobart Logistics.

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

The FRC ordered changes to Galliford Try’s accounts two years ago after it overstated its assets by £94.3mn in its accounts to June 2018.

The FRC’s examination of PwC’s auditing 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 scrutinised, one of the people added.

The regulator in 2020 said Galliford Try should not have recognised an £80mn legal claim relating to the ill-fated Aberdeen bypass project as an asset. It also flagged problems with the classification of certain cash flows.

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

Kier, the UK government’s largest construction contractor, plunged into crisis in 2018 after debt-fuelled acquisitions left it struggling with its balance sheet.

In 2019, just months after a rights issue that left banks nursing heavy losses, Kier revealed an accounting error which wiped millions off the share price. PwC still audits the company.

If the regulator finds that PwC failed to meet the required audit standards, it has powers to reprimand the firm, impose a fine and order extra staff training.

The FRC began looking at the audits more closely after concerns were raised during its routine quality inspections, one of the people said. The exact stage of the regulator’s probes into PwC is not known but the person said the firm is likely to seek a settlement with the watchdog rather than defending any potential adverse findings at a public tribunal.

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

A senior auditor at another large accounting firm said there had been a “clamp down” by the FRC on construction sector audits, which involve difficult judgments on when companies should book revenues and costs under multiyear contracts.

The most high-profile case is the FRC investigation into KPMG’s audits of Carillion. KPMG is also defending a £1.3bn lawsuit by liquidators of the collapsed construction and services group, who claim the auditors failed to obtain proper evidence to justify the company recognising profits under long-term contracts.

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

PwC’s UK chair, Kevin Ellis, told the Financial Times in December that criticism of auditors by politicians and regulators was harming the profession. The group received the best score out of the Big Four accounting firms in the FRC’s most recent quality inspections.

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

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