This Press Notice concerns the outcome of an investigation into the relevant Statutory Auditor(s). The investigation does not relate to any persons other than the relevant Statutory Auditor(s) and it would not be fair to treat any part of this announcement as constituting or evidencing an investigation into any other persons or entities.

The Executive Counsel of the Financial Reporting Council (the FRC) has issued a Final Settlement Decision Notice under the Audit Enforcement Procedure and imposed sanctions against PricewaterhouseCoopers LLP (PwC) and Richard Hughes (Mr Hughes), Audit Engagement Partner (together, the Respondents), in relation to the statutory audit of the financial statements of BT Group plc (BT), for the financial year ended 31 March 2017 (the Audit).

The following sanctions have been imposed:

  • A financial sanction of £2,500,000 adjusted for admissions/early disposal to £1,750,000;
  • Non-financial sanctions, comprising:
    1. a Severe Reprimand; and
    2. a declaration that the Audit Report did not satisfy the Relevant Requirements.

Mr Hughes:

  • A financial sanction of £60,000 adjusted for admissions/early disposal to £42,000;
  • Non-financial sanctions, comprising:
    1. a Severe Reprimand; and
    2. a declaration that the Audit Report did not satisfy the Relevant Requirements.

PwC and Mr Hughes have each admitted breaches of Relevant Requirements in relation to the audit of adjustments between the current and prior years disclosed by BT in its financial statements for the financial year ended 31 March 2017 (FY17 Financial Statements) which were made following the identification of a fraud in its Italian operations in 2016.

The scale of the BT Italy fraud was such that in the FY17 Financial Statements BT disclosed adjustments of approximately £513m. These adjustments were made up of (i) corrections of prior period errors of £268m and (ii) changes in accounting estimates of £245m (the BT Italy Adjustments). The prior-period errors were corrected by restating the prior-period comparatives in the FY17 Financial Statements.

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One element of the changes in accounting estimates was the receivables balance which comprised two adjustments totalling £72m (the Debt Adjustments). The Respondents did not approach the audit of BT’s treatment of the Debt Adjustments with the necessary professional scepticism and they failed to adequately document their audit work across the entirety of the BT Italy Adjustments.

The breaches

PwC had identified the accounting treatment and related disclosures in respect of the impact of the fraud as a significant risk. There was a need for heightened professional scepticism in relation to BT’s treatment of the BT Italy Adjustments and in particular the relative amounts attributed to the correction of prior-period errors and changes in accounting estimates given: (i) the particular requirements of the applicable accounting standard, IAS 8; (ii) queries raised by PwC USA’s regulatory advisory team as to the ratio of the adjustments and whether they were fully supported by evidence; and (iii) if the errors were material in any prior period a “restatement” would be required for US reporting purposes and BT had stated the value of the errors to fall short of the materiality thresholds in all relevant years (2012 to 2016), and only just short (by approximately £1 million) of the materiality threshold in 2016.

Despite this, in relation to the Debt Adjustments, the Respondents: (i) failed to act with the requisite professional scepticism; (ii) did not obtain sufficient appropriate audit evidence; and

(iii) did not properly determine whether the changes in accounting estimates were appropriate. In relation to the total sum of the BT Italy Adjustments the Respondents also failed to prepare audit documentation that was sufficient to enable an experienced auditor, having no previous connection with the audit, to understand the nature, timing and extent of the audit procedures performed.

For the avoidance of doubt, the Executive Counsel has not made a finding that the 2017 Financial Statements were misstated, that the total sum of the BT Italy Adjustments was wrong, or that the breaches were intentional, dishonest or reckless. The stage at which admissions were made has been reflected in the 30% discount applied to the financial sanctions.

These breaches concern the audit of BT for the financial year ended 31 March 2017 which formed part of a wider investigation which included within its scope PwC’s audits of BT’s financial statements for the years ending 2015 and 2016. The investigation in relation to those earlier years was closed without enforcement action. (link to original press notice –

Claudia Mortimore, Deputy Executive Counsel, said: In determining the financial impact of a major fraud detected within a business, difficult but important issues relating to appropriate accounting treatment and disclosures will need to be addressed. It is vital that these are subject to robust audit so that the users of financial statements can have confidence that the financial impact is properly and accurately stated in subsequent financial statements. The sanctions imposed in this case, where certain elements of the adjustments following a fraud were not subject to the required level of professional scepticism, underscore this message and will serve as a timely reminder to the profession”.

The Final Decision Notice is available here.