Regulator Punishes BDO Over Deficient Audit Work Ahead of NMCN Failure

Audit firm BDO has been sanctioned by the Financial Reporting Council (FRC) after investigators identified major weaknesses in its review of contractor NMCN’s finances before the business collapsed into administration.

The watchdog imposed a financial penalty of more than £1.3m on the firm, while the lead audit partner involved in the engagement also received a personal fine and formal reprimand.

Investigation focused on 2019 accounts

The case centred on BDO’s audit of NMCN’s 2019 financial statements, completed roughly 18 months before the contractor failed in October 2021.

At the time, NMCN reported annual revenues exceeding £400m and pre-tax profits of £7.5m while continuing to operate across infrastructure, utilities and civil engineering markets.

However, the FRC said the audit process fell short in several fundamental areas linked to construction accounting and financial risk assessment.

Construction contract scrutiny deemed inadequate

Regulators found shortcomings in how BDO assessed long-term contracts — a critical issue for infrastructure businesses where project profitability can shift significantly over time.

According to the findings, the audit team did not sufficiently test assumptions around project margins, contract values, future costs and recoverable income.

Large portions of the contractor’s live projects reportedly received limited detailed examination, despite the financial exposure associated with those contracts.

The regulator also criticised the audit approach taken towards delayed schemes, possible claims exposure and projects at risk of financial underperformance.

Questions raised over financial resilience testing

Particular concern was also raised around BDO’s assessment of whether NMCN could continue operating as a going concern during the uncertainty created by the Covid-19 pandemic.

The FRC concluded that the firm failed to apply enough challenge to management forecasts and did not adequately assess the contractor’s resilience under worsening trading conditions.

Investigators said the audit team did not demonstrate sufficient professional scepticism when reviewing evidence and management explanations.

Collapse followed mounting financial pressure

NMCN entered administration in late 2021 following a series of profit warnings, operational difficulties and increasing pressure on cashflow.

The collapse triggered significant disruption across live infrastructure projects and supply chains, with administrators later overseeing the sale and transfer of parts of the business.

Firm cooperated with investigation

While the FRC described the audit failures as serious and widespread, it confirmed there was no finding of dishonesty or intentional misconduct by either BDO or the lead partner involved.

The regulator also acknowledged that BDO had cooperated extensively throughout the investigation process, resulting in a reduction to the original financial penalty.

Wider scrutiny on construction sector audits

The case adds to ongoing regulatory pressure surrounding audit quality within the construction and infrastructure sector, where complex contract accounting and long-term project forecasting continue to present significant risks for auditors.

The FRC said BDO has since updated its audit methodology for infrastructure and contracting businesses as part of broader efforts to strengthen oversight and improve audit standards in higher-risk sectors.