The successful case brought by the Accountancy and Actuarial Discipline Board (AADB) is the latest sign of how regulators are taking a harder line on auditors, seen by policymakers as being too soft on banks in the run-up to the financial crisis.
The AADB said PwC, one of the world's "Big Four" auditors, which check the books of nearly all blue-chip companies, admitted it failed to obtain "sufficient appropriate evidence" to report that J.P. Morgan Securities complied with strict client money rules spanning several years.
Most of the client money from futures and options trading was being daily "swept" into interest-bearing, unsegregated accounts overnight at J.P. Morgan Chase bank, the firm's parent, the AADB said.
In June 2010 the UK Financial Services Authority (FSA) slapped a record 33.32 million pound fine on J.P. Morgan Securities for failing to keep client money separate at all times from the firm's money over a seven-year period to July 2009.
Sums ranging between $1.9 billion and $23 billion of client money were being held in unsegregated accounts that would have been at risk of loss had the lender become insolvent, the FSA said at the time.
On Friday the AADB said an independent tribunal found that PwC's misconduct was "very serious."
The tribunal would have fined PwC 2 million pounds but reduced the penalty because the auditor had cooperated. The tribunal also made PwC pay the AADB's costs in investigating and prosecuting the case.
SURPRISED AND CONCERNED
The AADB had proposed a 6 million-pound fine, while PwC had suggested to the tribunal the fine should be at the lower end of a 500,000 to 1 million-pound range.
"It's an appropriate penalty, given the framework the tribunal had to deal with," Tom Martin, AADB executive counsel, told Reuters.
Sanctions are being reviewed, however, as part of updating the Financial Reporting Council, the regulatory umbrella group to which the AADB belongs.
"We think there may be a time for debate about the level of sanctions for firms the size of the Big Four," Martin said.
The tribunal appeared to call for further action.
"We wish to comment that we have been surprised and concerned that no partner at PwC has been named in relation to this matter or proceeded against by the (AADB's) Executive Counsel," the tribunal said in its ruling.
Martin said the AADB planned to take no further action against PwC in the J.P. Morgan Securities case.
Barclays was fined 1.1 million pounds in January last year for client money rules breaches, and the AADB is probing PwC's role as auditor.
PwC chalked up gross revenues of $29.2 billion in the financial year that ended June 30, 2011.
The complaint against PwC focuses on its reports to the FSA for the seven years ended Dec. 31, 2001 to Dec. 31, 2008. The segregation error came to light on July 8, 2009.
The safety of client money was thrust into the spotlight in September 2008 when US bank Lehman Brothers went bust. The AADB is probing auditor Ernst & Young's role in Lehman's failure to hand back client money in Britain.
Following Lehman's demise, the FSA set up a team of nearly 40 staff to monitor client money rules, and its record fine on J.P. Morgan Securities is one of seven fines for breaches.
Britain's biggest fine for an auditor had been 1.2 million pounds in 1999, also for PwC, in relation to the failings of Coopers & Lybrand, which later merged with Price Waterhouse to form PwC, in its work on the accounts of the late Robert Maxwell's group of companies.
