Audit giants fined over £237m fraud that rocked City

Andrew Bailey (third from right) met with LCF protesters over the scandal when he was Financial Conduct Authority chief in 2019 – Julian Andrews

Two of Britain’s biggest accountancy firms have been fined for their role in the £237m London Capital & Finance (LCF) mini-bond scandal.

Multimillion-pound penalties have been handed to PwC and EY by the Financial Reporting Council (FRC), which found that the firms committed failures when auditing the defunct company’s accounts.

The watchdog singled out Big Four accountants for failing to adequately understand LCF’s business and its internal controls, adding that the pair did not apply enough scrutiny when auditing the company’s financials.

As a result, PwC and EY have received fines of £4.9m and £4.4m respectively, discounted from £7m after admitting failure.

LCF was a savings and investment firm which sold unregulated mini-bonds promising returns of up to 11pc.

However, nearly 12,000 investors lost £237m when the company entered into administration in 2019.

The Financial Conduct Authority, which was rebuked for failing to supervise and regulate LCF before its collapse, has since banned the mass-marketing of risky speculative illiquid securities – including speculative mini-bonds – to retail investors.

The Serious Fraud Office’s investigation into alleged fraud and money laundering at LCF is ongoing.

The FRC’s criticism of PwC and audit engagement partner Jessica Miller stems from failures in auditing LCF’s accounts for 2016, a year in which the company issued a further £9.2m in bonds and was growing rapidly.

PwC resigned as LCF’s auditor in October 2017. The firm’s £4.9m penalty and a £105,000 fine for Ms Miller were both discounted by 30pc.

The FRC also severely reprimanded EY and audit engagement partner Neil Parker having audited LCF’s full-year accounts for 2017. During that year, LCF issued a further £53.4m in bonds.

The regulator initially proposed fining EY £7m and Mr Parker £75,000 but discounted the penalties by 40pc for admissions, early disposal and mitigating factors.

EY and Mr Parker must pay £4.4m and £47,250 respectively.

Around 11,500 people put money into London Capital & Finance, which the FCA said offered ‘unsuitable, high-risk products’ – Julian Andrews

The regulator treated EY’s exceptional level of cooperation as a mitigating factor after the firm proactively conducted its own analysis to discover the root causes of the audit failures and shared the findings with the FRC.

Oliver Clive & Co (OCC), an accountancy firm based in London’s West End, and its head of audit and assurance Emma Benjamin, were also penalised for failures while auditing LCF’s financial statements for one month in 2015.

The regulator found that OCC’s breaches were “still serious” despite LCF at the time being a small company with a £1.25m loan book, a single borrower and 36 bondholders.

OCC and Ms Benjamin were fined £42,000 and £14,000 respectively, both discounted 30pc for admissions and early disposal.

The watchdog found that all three auditors failed to provide the “reasonable assurance” that LCF’s accounts did not contain material misstatements, whether caused by fraud or error.

Jamie Symington, the FRC’s deputy executive counsel, said: “These breaches are made considerably more serious by the fact that all of the auditors knew they were auditing an expanding business which was engaged in selling unregulated financial products to retail investors, and that potential investors might place reliance on the clean audit opinions.”

The FRC said that all auditors cooperated with the FRC’s investigation and none were found to have acted dishonestly or recklessly.

An EY spokesman said: “Our 2017 audit of London Capital & Finance fell short of our standards and for this we apologise. We have taken significant steps to address the issues identified and we are committed to learning from our mistakes.”

A PwC spokesman said: “We are sorry our work in 2016 did not meet the standards expected and that we expect of ourselves. In the eight years since this work took place, we have made significant changes to our audit methodology, policies and guidance.”

OCC was contacted for comment.

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