The FRC has begun an investigation into the conduct of PwC, in relation to the audit of the financial statements of Redcentric for the years ended 31 March 2015 and 31 March 2016. The decision to investigate follows Redcentric’s announcement dated 23 December 2016 of the conclusion of an independent investigation into Redcentric’s accounting practices and the consequent restatement of the company’s consolidated financial statements and other financial information relating to those years. 

The FRC says its investigation will consider, but not be restricted to, issues regarding misstated accounting balances.

Following the announcement of its discovery of irregularities In November 2016, Redcentric served notice on CFO Tim Coleman, who was placed on gardening leave with immediate effect, and appointed Deloitte and Nabarro to carry out an independent forensic review.

The initial findings of this review stated: ‘To date there has been no evidence of theft and the misstatements are attributable to profit overstatement over a number of years with revenues being overstated and costs understated in broadly equal proportions.’ 

The review put the cumulative overstatement of net assets and profits after tax up to 30 September 2016 at approximately £20.8m, and said that approximately £5.9m of this misstatement (£4.7m at the EBITDA level) arose in the six months ended 30 September 2016. The remaining £14.9m misstatement relates to periods prior to and including the year ended 31 March 2016. 

The review also confirmed that the net debt position for both 31 March 2016 and 30 September 2016 was materially higher than originally reported.  As at 31 March 2016, net debt was £37.8m and as at 30 September 2016 net debt was £34.4m.

The review stated: ‘However, the net debt position as at the period ends mentioned above are not representative because creditors had been significantly stretched at those dates. The average month end net debt position over the past eight months to 30 November 2016 was £42m. This is expected to reduce as billing and debtor collection processes are improved.’ 

Redcentric also reported it was executing a remedial plan of action, which included the appointment of a new CFO, Peter Brotherton, who was conducting a full review of the entire finance function.  The company said a number of initial improvements had already been made including changes to billing and credit control management systems and processes. 

In its revised interim statement for the six months ended 30 September 2016, Redcentric reported revenue of £53m and EBITDA £9.1m.

In a further update on the forensic review, the company said it had identified ‘a number of process and control failings which required prompt rectification action’. Redcentric said improvements have and are being made to the company's finance function and internal policies and procedures, including more robust internal controls around cash reconciliations and improvements to billing and credit control management systems and processes.

Redcentric said improvements under the remedial plan, which include replacing multiple legacy back office systems with a standard integrated Microsoft platform, will continue throughout the first half of 2017. The forensic review and subsequent remedying actions will result in an exceptional charge of approximately £1m for the current financial year.

A PwC spokesperson said: 'We will co-operate fully with the FRC in its enquiries.'