Redcentric – Devasting Report on Audit Quality

I have commented on the accounting problems at Redcentric (RCN) before – see https://roliscon.blog/2019/06/13/pwc-fined-over-audit-at-redcentric/ . Mark Bentley of Sharesoc has written a good article on the audit issues at this company on their blog here: https://www.sharesoc.org/blog/regulations-and-law/redcentric-rcn-campaign-important-developments/

He covers the report from the Financial Reporting Council (FRC) on the audit which has only taken them two years to produce – that’s fast for the FRC. But if you read the report you will see that it is a devastating critique of the quality and professionalism of the audit by PwC.

An investigation by the Financial Conduct Authority (FCA) is still on-going apparently and ShareSoc is talking to lawyers about possibly legal action to recover losses suffered by investors from reliance on clearly inaccurate accounts.

But there are simply too many such cases and shutting the stable door several years after the horse has bolted is not good enough. The Government needs to look at how to prevent such problems by improving the standards of accounts, and improving the auditing of them. Some reforms have already been proposed in that regard but whether they will have an impact on the activities of smaller AIM companies, where a lot of the problems occur, has yet to be seen.

At the core of the problem is the failure to make the individuals (i.e. the directors and senior management) in such companies personally responsible. Pursuing the companies or their auditors is only a limited solution and shareholders often bear the costs when the individuals concerned need to be deterred by prison sentences I suggest. But that means changes to the law to make it easier to prosecute such cases.

And the FCA needs much more resources to enable them to pursue such cases quickly and forcefully. There is so much fraud taking place in the financial world that most goes undetected, unrecognised and unprosecuted.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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PwC Fined over Audit at Redcentric

Audit firm PwC have been fined £4.5 million by the Financial Reporting Council (FRC) for the defective audits of Redcentric (RCN) in 2015/2016. Two audit partners at the firm were also fined £140,000 each.

Redcentric is an IT services company which had to restate its accounts when a £20 million hole was discovered. Assets were written down and the profit of £5.3 million in 2016 was restated to be a loss of £4.2 million. Professional scepticism by the auditors was apparently missing so that management were able to present fictitious figures and get them through the audits.

The current Chairman of Redcentric appears to be reluctant to pursue legal action on behalf of shareholders against PwC which is surely unfortunate. Shareholders would have difficulty in pursuing an action for their losses directly because of the Caparo legal judgement, but a “Derivative” action can be pursued I suggest.

But this is yet another case where the audit profession has failed to pick up serious defects in the accounts of a company. It’s yet another example of why the audit profession needs to improve its game to meet the reasonable needs of investors and other stakeholders.

I have never held shares in this company but I feel for those who were duped by the company and its management into investing in it.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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