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PwC fined £2.3m for subprime lending audit errors

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PricewaterhouseCoopers has been fined £2.3m by the Financial Reporting Council for mishandling the auditing of failed subprime lender Welcome Financial Services.

PwC audited the financial statements of Cattles and its subsidiary, Welcome, for the 2007 year.

The FPC since carried out a disciplinary case about how PwC and the then audit engagement partner Simon Bradburn handled the audit.

The FPC says PwC and Bradburn both failed at aspects of handling the audit.

An FPC statement says: “PwC and Mr Bradburn have admitted that their conduct fell significantly short of the standards reasonably to be expected of a member firm and a member respectively in issuing unqualified audit opinions in respect of the 2007 Cattles and Welcome financial statements in circumstances where PwC (i) had insufficient audit evidence as to the adequacy of the loan loss provision and (ii) had failed to identify the fact that the impairment policy was not adequately disclosed and that the disclosures in those financial statements were not in compliance with IFRS 7.”

PwC has been fined £3.5m, reduced to £2.3m after mitigation and a settlement discount.

The firm will also pay an extra £750,000 as a contribution towards the cost of the disciplinary case.

The FPC has also fined Bradburn £120,000, reduced to £75,600 after mitigation and a settlement discount.

FRC executive counsel Gareth Rees says: “The substantial fines imposed in this case reflect the seriousness of the audit failings in relation to the critical area of impairment provisioning in a sub-prime lender and will send a strong signal to the audit community of the importance of upholding high standards of professional conduct in audit work.

“I welcome PwC’s and Mr Bradburn’s constructive approach which has enabled us to reach this settlement. The admissions of misconduct have resulted in a significant saving in time and costs and the fines ultimately imposed have been reduced accordingly.”

A PwC spokesman says: “While the FRC has acknowledged that we had been deliberately misled by third parties, we recognise that certain aspects of this 2007 audit fell short of expected standards.

“Audit quality is of paramount importance to PwC and the FRC’s annual audit quality assessments have shown a trend of improvement in our work over several years.”

In March 2012 the FSA banned and fined Cattles finance director James Corr £400,000 and banned and fined Welcome finance director Peter Miller £200,000 for their roles in publishing misleading information.

In October 2012 the FSA banned former Welcome managing director John Blake, who was also fined £100,000, for providing false and misleading statements about the quality of the company’s loan book.

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