Audit giant PwC ignored warnings over irregularities in the accounts of British defence contractor Babcock International for years, even after they were flagged by analysts, according to sources speaking to City AM.
In an email to this paper, analyst firm Boatman Capital Research said: “The Boatman and others were warning about accounting issues at Babcock from 2018 and, not for the first time, the auditors appear not to have paid any attention. While PWC clearly has questions to answer, the problems at Babcock were created by its previous management team.”
The comments come after UK regulators said they will push forwards with an investigation into PwC’s audit of the British defence company.
Boatman’s comments to City AM come after the group took credit for the FRC probe into PwC via Twitter. “Boatman’s early reports on $BAB continue to make waves. PWC appears to have ignored evidence of accounting irregularities and signed off accounts that were later written down by £2bn,” the group said in a Tweet on the 17 January.
The UK’s Financial Reporting Council (FRC) said in a statement that it will commence its investigation into PwC’s audit of Babcock, for the financial years (FYs) ending on 31 March 2019 and 31 March 2020.
The FRC’s investigation comes after the UK accountancy watchdog continues its ongoing investigation into PwC’s audit of Babcock for the FYs ending on 31 March 2017 and 31 March 2018.
Burying bad news?
The FRC probe comes after Babcock unveiled the outcome of its Contract Profitability and Balance Sheet review, which resulted in around 140 adjustments to its balance totalling more than £2 bn.
In a financial statement, Babcock said the adjustments include goodwill impairments of more than £1.2 bn, including an £817.4 m impairment on its Aviation sector and £425.8 m impairment on its Land sector. In the same financial statement, the defence contractor said the impairments came about “as a result of reduced forecasts of future cash flows and an increase in the discount rate used to discount them.”
Babcock’s review came after Boatman Capital Research, a shadowy financial investigation group, slammed the defence contractor for misleading investors by “burying bad news about its performance.” Boatman also accused Babcock of being “opaque, needlessly complex, needlessly expensive and prone to errors.”
Babcock dismissed Boatman’s claims as a “malicious attack” on the firm, as it described the group’s allegations as “inaccurate and misleading.”