PricewaterhouseCoopers (PwC) has been fined £1.4 million by regulators, after it signed off a report containing serious rule-breaking client money practices at JP Morgan Chase - the result of a major IT switchover that failed to keep pace with changed business processes.
The Accountancy and Actuarial Discipline Board (AADB) issued the fine as it ruled that PwC wrongly reported over a seven year period that JP Morgan had maintained the right systems to correctly separate clients' money from its own.
The "highly automated" systems processed up to £15 billion of assets, and by not separating the money appropriately, there was a risk of clients' losing their assets if JP Morgan had gone bust, the regulator stated.
In 2010, JP Morgan Chase was fined £33.3 million over the issue by the Financial Services Authority, prompting this investigation of PwC's auditing.
The AADB ruled today that PwC had failed to obtain evidence that JP Morgan had the right systems in place, but nevertheless signed off the accounts.
The regulator described the breach and the value of money at risk as "very serious".
"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", it wrote in a decision notice.
PwC has accepted that it "did not carry out its professional work ... with due skill, care and diligence and with proper regard for the applicable technical and professional standards expected", the regulator noted.
A spokesperson at PwC said in a statement: "We regret that one aspect of our work on the private client money report to the FSA fell beneath our usual high standards. When the issue was identified, and before any complaint had arisen, we took action to ensure that staff received additional training in the client monies area."
The system problems occurred in the seven years from 2002, two years after the merger of JP Morgan and Chase Manhattan. After the merger, JP Morgan Securities had moved its activities onto systems used by other parts of the JP Morgan Chase group.
An error meant that after changing Futures and Options client money system over to those used across the bank, the daily automated money segregation processes never took place and never reflected the merged processes of the newly merged group. Staff wrongly assumed the processes were working as normal.
The problem was left uncorrected for the seven year period, until it became clear during a JP Morgan management discussion in 2009.