The Financial Reporting Council (FRC) has issued a second PwC Babcock audit fine, sanctioning the Big Four firm and a former partner a combined £3.26m for failures across the 2019 and 2020 audits of the defence contractor, bringing PwC’s total penalties over Babcock’s audits to approximately £8.8m.
PwC’s original fine of £5.5m was reduced to £3.2m following cooperation, admissions and early disposal. Former audit partner John Waters received a financial sanction of £59,062, cut from a starting figure of £100,000 after a 12.5% discount for exceptional cooperation and a further 32.5% for admissions and early disposal, according to the FRC’s settlement decision notice.
Failures Across Six Audit Areas
The FRC’s Final Settlement Decision Notice sets out breaches spanning aircraft-related costs, cash pooling, financing arrangements, goodwill impairment assessments, intangible assets, and long-term contracts. PwC and Waters also failed to achieve fair presentation and compliance with accounting standards across five aspects of those audits.
The regulator found that PwC and Waters failed to critically challenge management’s accounting choices, failed to respond appropriately to risks of material misstatement, and failed to obtain adequate audit verification across multiple core areas. Both admitted to extensive compliance failures across the two audit years.
The failures culminated in material restatements in Babcock’s 2021 financial statements to correct prior errors. PwC is also ordered to cover the full investigative costs of the executive counsel.
The FRC’s investigation into the FY2019 and FY2020 audits of Babcock International opened on 17 January 2022, according to the FRC enforcement cases register.
As part of the agreed sanctions, PwC has agreed to examine and report to the FRC specifically on its processes for changing audit engagement partners during an ongoing audit and on its response to indicators of increasing audit risk during an engagement.
The PwC Babcock Audit Fine History
This is the second time the FRC has fined PwC over its audits of Babcock International, a Public Interest Entity listed on the Main Market of the London Stock Exchange that provides engineering services including contracts with the Ministry of Defence.
In March 2023, the FRC issued sanctions arising from PwC’s FY2017 and FY2018 audits of Babcock and its subsidiary Devonport Royal Dockyard Limited. Under that action, the FRC’s March 2023 sanctions notice set PwC’s original fine at £7,500,000, then applied a 25% discount for admissions and early disposal, resulting in a financial sanction of £5,625,000. Two former partners were also sanctioned alongside the firm in that case, bringing the combined total for those sanctions to almost £8m.
In that earlier investigation, the FRC found PwC repeatedly failed to challenge Babcock’s management and failed to obtain a 30-year contract that accounted for around £77m of the defence company’s 2018 revenues.
Waters resigned from PwC in January 2023 after more than 35 years at the firm.
The FRC acknowledged mitigating factors in the current case. Waters was appointed to the FY2019 audit at short notice, after the audit had already commenced, with no opportunity for a handover from his predecessor. The pandemic was also recognised by the FRC as having made the FY2020 audit ‘significantly more difficult.’
Penrose Foss of the FRC said: ‘The quality of these audits fell short of the standards expected of statutory auditors.’
She added: ‘The FRC acknowledges that the audit engagement partner assumed his role in FY2019 in challenging circumstances. In such circumstances, however, the firm and the audit engagement partner should together have ensured that those challenges were appropriately addressed, and the audit work performed in accordance with applicable standards.’
The Babcock cases sit alongside other recent FRC actions against PwC. Reuters reports the firm has also faced sanctions over its audit of Wyelands Bank in 2025 and its audit of BT Group’s Italian accounts in 2022. The Accountant Online also covered Thursday’s ruling.
Dame Jayne-Anne Gadhia was named earlier this week as the government’s choice to chair the FRC, with her tenure set to begin in September.
The PwC-mandated review of partner-handover processes and audit-risk escalation procedures will be a concrete test of whether the firm’s remediation satisfies the regulator before Gadhia takes the chair.
