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Watchdog hits PwC with two probes
From the Financial Times of Mon, 22 Dec 2014 12:20:16 GMT

The UK accountancy watchdog announced two separate investigations into PwC on Monday, related to its audit clients Tesco and Barclays, adding to pressure on the big four accountancy firm, which was accused this month by MPs of “selling tax avoidance on an industrial scale”.

The Financial Reporting Council confirmed that it was investigating the preparation, approval and PwC’s audit of Tesco’s financial statements for the retailer’s past three financial years. Tesco was plunged into turmoil after it said in September it had overstated its first-half profits by £250m, a month later adding that the overstatement was in fact £263m.

The FRC investigation also centres on the run-up to Tesco’s interim results – which are not audited – for the 26 weeks ending August 23 2014. It comes almost two months after the UK’s Serious Fraud Office launched a criminal investigation into the retailer’s alleged accounting irregularities.

At the heart of the accounting issue for Tesco, which has been audited by PwC since 1983, is the way that it recognises commercial income. These are payments made for hitting a certain level of sales, or to support promotions. In Tesco’s 2014 annual report, PwC highlighted the recognition of commercial income as an area of focus “because of the judgment required in accounting for the commercial income deals and the risk of manipulation of these balances”.

The accounting errors at Tesco has resulted in the suspension of eight senior managers, known as the Cheshunt Eight after the location of Tesco’s head office north of London. Its board of non-executive directors has been shaken up and the retailer is looking for a new chairman, following the announcement that Sir Richard Broadbent will leave.

Tesco said: “We note the Financial Reporting Council is launching an investigation into individuals and a member firm in relation to the preparation, approval and audit of our accounts for the last three years. We will provide support to the FRC’s investigation.”

Also on Monday, the FRC launched a probe into PwC and another of its audit clients, Barclays. It is looking at PwC’s reporting to the Financial Services Authority on the bank’s compliance between 2007 and 2011 with the then UK regulator’s rules on client asset segregation. Barclays declined to comment.

The FRC said its decision to investigate PwC followed the final notice serviced on Barclays by the Financial Conduct Authority in September when the FSA’s successor fined the UK lender £37.7m – a record for this type of misconduct – for failing to keep appropriate records on about £16.5bn of clients’ money that its investment bank placed with third-party custodians between 2007 and 2012.

PwC said: “We take our responsibilities very seriously and remain committed to delivering work to the highest professional standards. We will co-operate fully with the FRC in its enquiries.”

The two investigations add to mounting pressure on PwC, whose tax division is under increasing political scrutiny. At a parliamentary hearing this month, MPs on the public accounts committee denounced PwC for devising financing structures that allowed companies to secure very low tax rates in Luxembourg. It was sparked by the leak of hundreds of Luxembourg tax rulings, which lift the lid on controversial tax practices in the corporate world.

Additional reporting by Andrea Felsted

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