The regulator imposed a financial penalty of £3.25m on PwC, reduced from a starting point of £5.5m to reflect the firm’s exceptional cooperation, admissions and early settlement.

John Waters, the audit engagement partner for Babcock’s 2019 and 2020 audits, was also fined £59,062, down from an initial £100,000 on the same basis.

Both PwC and Waters received severe reprimands, while the FRC declared that the audit reports for the years ending 31 March 2019 and 31 March 2020 failed to meet the required auditing standards. PwC has also been ordered to implement measures aimed at preventing similar failings and will pay the FRC’s investigation costs.

The sanctions relate to statutory audits of Babcock, the London-listed engineering group that provides critical infrastructure and defence services, including contracts for the Ministry of Defence.

The FRC said PwC and Waters admitted “serious and numerous” breaches across several areas of the audits, including cash pooling arrangements, financing for an overseas contract, aircraft costs, an intangible asset, goodwill impairment, credit notes and two long-term contracts.

According to the regulator, the auditors failed to exercise sufficient professional scepticism, did not obtain enough appropriate audit evidence and failed to adequately challenge management’s accounting treatment in a number of areas, resulting in an insufficient response to the risk of material misstatement.

Some of the issues identified ultimately led to material prior-period restatements in Babcock’s 2021 financial statements.

As part of the settlement, PwC has agreed to review and report to the FRC on its procedures for changing audit engagement partners during an audit and its processes for responding to increasing audit risk.

The regulator noted that Waters took over the 2019 audit after it had already begun, without a formal handover from his predecessor, while the 2020 audit was further complicated by the Covid-19 pandemic. However, it said those challenges did not remove the responsibility on both the firm and the engagement partner to ensure the audits met the required standards.

Penrose Foss, executive counsel at the FRC, said: “PwC and the new audit engagement partner appointed in relation to those financial years have admitted serious and numerous breaches. These included significant contraventions of the fundamental requirements to perform an audit with adequate professional scepticism and to evaluate effectively whether the financial statements complied with accounting standards and achieved fair presentation of the underlying transactions.

“The quality of these audits fell short of the standards expected of statutory auditors.”

The latest enforcement action follows sanctions imposed by the FRC in March 2023 against PwC and two audit partners in relation to Babcock’s 2017 and 2018 audits.