January 6, 2012 / 10:00 AM / 6 years ago

UPDATE 1-PwC hit with record fine for UK audit failures

* Accounting board wanted much higher fine

* Tribunal “surprised” no PwC partner has been named

* PwC also being probed for Barclays client money breach

* PwC says regrets failure, took speedy action

By Huw Jones

LONDON, Jan 6 (Reuters) - Top auditor PricewaterhouseCoopers has been fined a record 1.4 million pounds ($2.2 million) in Britain for wrongly telling local regulators for seven years that JPMorgan Securities was keeping client money safe.

The case brought by the Accountancy and Actuarial Discipline Board was the latest sign regulators have been taking a harder line on auditors, seen by policymakers as being too soft on banks in the run-up to the financial crisis.

The AADB said on Friday PwC, one of the world’s so-called “Big Four” auditors which check the books of nearly all blue-chip companies, admitted it failed to obtain “sufficient appropriate evidence” to report JPMorgan Securities complied with strict client money rules over several years.

Most of the client money from futures and options trading was being “swept” daily into interest-bearing, unsegregated accounts overnight at JPMorgan Chase bank, the firm’s parent, the AADB said.

In June 2010, Britain’s Financial Services Authority slapped a record 33.3 million pound fine on JPMorgan Securities for failing to keep client money separate at all times from its own money over a seven-year period to July 2009.

Sums of client money ranging from $1.9-$23 billion were held in unsegregated accounts that would have been at risk of loss had the lender become insolvent, the FSA said at the time.

On Friday, the AADB said an independent tribunal found PwC’s misconduct was “very serious”.

The tribunal would have fined PwC 2 million pounds but reduced the penalty because the auditor had cooperated. The tribunal also made PwC pay the AADB’s costs.

PwC said it regretted that one aspect of its work on the private client money report to the FSA fell below “our usual high standards”.

“When this issue was identified, and before any complaint had arisen, we took action to ensure that staff received additional training in the client monies area,” PwC said.


The AADB had proposed a 6 million pound fine, while PwC had suggested to the tribunal the fine should be at the lower end of a 0.5-1.0 million pound range.

“It is an appropriate penalty, given the framework the tribunal had to deal with,” Tom Martin, AADB executive counsel, told Reuters.

Sanctions are being reviewed, however, as part of updating the Financial Reporting Council, the regulatory umbrella group to which the AADB belongs.

“We think there may be a time for debate about the level of sanctions for firms the size of the Big Four,” Martin said.

The tribunal appeared to call for further action. “We wish to comment that we have been surprised and concerned that no partner at PwC has been named in relation to this matter or proceeded against by the (AADB‘s) Executive Counsel,” it said.

Martin said the AADB planned to take no further action against PwC in the JPMorgan Securities case.

The complaint against PwC focused on its reports to the FSA for the seven years to Dec. 31, 2008. The segregation error came to light on July 8, 2009.

Barclays was fined 1.1 million pounds in January last year for client money rules breaches, and the AADB is probing PwC’s role as auditor.

PwC, which chalked up gross revenues of $29.2 billion in its financial year to end-June 2011, was expected to defend its work in the Barclays issue.

The safety of client money was thrust into the spotlight in September 2008 when U.S. bank Lehman Brothers went bust. The AADB is probing auditor Ernst & Young’s role in Lehman’s failure to hand back client money in Britain.

Following Lehman’s demise, the FSA set up a team to monitor client money rules, and its fine on JPMorgan Securities was one of seven fines that have been issued to firms.

Britain’s biggest fine for an auditor had been 1.2 million pounds in 1999, also for PwC, in relation to the failings of Coopers & Lybrand, which later merged with Price Waterhouse to form PwC, in its work on the accounts of Robert Maxwell’s group of companies.

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