PwC fined £1.4m for audit failure

The UK arm of PwC, the auditor, has been fined £1.4m and severely reprimanded for its failure to discover that billions of dollars of client money had not been ringfenced properly at JPMorgan Chase, the US bank.

The fine is the largest yet for a UK accountancy firm, but it is far smaller than the penalty mooted by regulators as appropriate, which could have run into tens of millions of pounds.

The lack of disciplinary action against individual auditors was criticised by an industry tribunal, which also raised concerns over whether a deal had been struck to protect PwC partners.

Financial services groups are supposed to ringfence client money from their own cash in order to protect customers in the event of insolvency. As auditor to JPMorgan Securities Limited, a UK-regulated arm of JPMorgan, PwC had told regulators the company complied with the separation rules in 2002-08.

But in that period, JPMorgan Securities had inadvertently placed up to $23bn of client money with its own, albeit without loss to customers.

The lapse led to JPMorgan Securities being fined a record £33m by the UK Financial Services Authority in 2010.

PwC’s role was then probed by the Accountancy & Actuarial Discipline Board, part of the Financial Reporting Council, and then referred to an independent tribunal that adjudicates on AADB investigations.

“A global organisation with the resources of PwC . . . should never place itself in a position in which an elementary inquiry as to the final destination of client money is not properly answered,” the tribunal said. But it disagreed with an AADB suggestion that the fine be based on PwC’s profits along the lines of JPMorgan Securities’ penalty, saying the method would have yielded a penalty of £44m.

PwC, which admitted failings, had suggested a fine of £500,000-£1m. The previous record was £1.2m in 1999 against Coopers & Lybrand, now part of PwC. PwC also expressed regret, saying: “When the issue was identified, and before any complaint had arisen, we took action to ensure that staff received additional training.”

The tribunal was “surprised” that no PwC partner had been pursued: “We must simply trust that there has been no bargaining of PwC’s admission against an agreement on anonymity.”

PwC is the UK’s biggest accountant by sales. In another AADB investigation into client money separation breaches, it is defending its audit work at Barclays Capital.

The US arm of PwC was also auditor to MF Global, the broker-dealer that collapsed last year, leaving $1.2bn of customer funds missing.

Additional reporting by Brooke Masters