The Executive Counsel of the Financial Reporting Council (FRC) has issued a Final Settlement Decision Notice under the Audit Enforcement Procedure and imposed sanctions against PricewaterhouseCoopers LLP and audit engagement partner, Philip Storer, in relation to the statutory audit of the financial statements of Eddie Stobart Logistics plc (ESL) for the financial year ended 30 November 2018.

The sanctions are:

Against PwC:

  1. A financial sanction of £3.5m adjusted for the mitigating factor of exceptional cooperation and further discounted for admissions and early disposal to £1.9m.
  2. Non-financial sanctions, comprising:
    1. a Severe Reprimand;
    2. a declaration that the 2018 audit report did not satisfy the Relevant Requirements; and
    3. an order requiring PwC to take specified actions to prevent the occurrence of the contravention.

Against Storer:

  1. A financial sanction of £90,000 adjusted for the mitigating factor of exceptional cooperation and further discounted for admissions and early disposal to £51,187.50.
  2. Non-financial sanctions, comprising:
    1. a Severe Reprimand; and
    2. a declaration that the 2018 audit report did not satisfy the Relevant Requirements.

ESL, a company operating in the supply chain, transport and logistics business, was listed on the Alternative Investment Market. KPMG performed the 2017 audit and resigned as auditor in 2018, because of a breakdown in their relationship with ESL’s management, following difficulties in obtaining sufficient appropriate audit evidence. PwC were subsequently appointed for the 2018 audit.

In July 2019, ESL announced that a review had been conducted into its prior year financial statements. Following this review, in 2020, ESL disclosed significant prior year accounting adjustments to the 2018 financial year. PwC and Storer breached Relevant Requirements in some of the areas which were subject to prior year adjustments.

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In summary, the auditors’ admitted failings related to the audit work carried out on:

  • the property transactions entered into by ESL, and the disclosure in the financial statements regarding those transactions.  These transactions had a significant effect on ESL’s financial performance, and without the profit generated from them, ESL would have been in a loss-making position;
  • first year audit procedures;
  • dilapidations;
  • accounting for a subsidiary company; and
  • property lease accruals. 

There were numerous serious failures in relation to the audit work on ESL’s property transactions, including a failure to identify revenue recognition on those transactions as a significant risk of material misstatement; failing to carry out a formal consultation on the technical aspects of accounting for these transactions; a lack of challenge of management’s selection of accounting policy; and a lack of professional judgement in their work on the transactions.  Furthermore, the disclosures in the financial statements failed to adequately explain the impact of the property transactions on ESL’s financial performance.

PwC and Storer assisted in the investigation by making comprehensive early admissions (including admissions relating to matters which were not in the communicated scope of the investigation), and this has been recognised in the discount to the financial sanction of 12.5% (in addition to the 35% reduction for early settlement) to reflect exceptional cooperation as a mitigating factor.

Commenting on this, FRC deputy executive counsel, Claudia Mortimore, said: “There were numerous, serious and pervasive failings in this audit.

“The case highlights the importance of, firstly, the auditor’s work in ensuring that disclosures in financial statements enable users to understand the impact of particular transactions on the entity’s financial performance, and, secondly, auditors undertaking formal consultation during the course of the engagement where appropriate.  The Respondents’ exceptional cooperation in the investigation has been recognised in the discount to the financial sanction.”