Babcock parts ways with long-term auditor PwC

Babcock International, the UK’s second biggest defence contractor, is parting ways with PwC, its longstanding auditor, as new chief executive David Lockwood puts his stamp on the group.

The company has appointed Deloitte as its new external auditor, subject to shareholder approval at this year’s annual meeting. PwC has advised Babcock since 2002.

Governance rules stipulate companies must rotate auditors after a maximum period of 20 years, although calls for more regulator rotation have intensified in the wake of corporate collapses, such as government contractor Carillion.

Babcock flagged a change was in the offing in its annual report last year.

The company unnerved investors in January when it signalled it could be forced to cut the expected value of contracts and future income.

In a trading update, Babcock said it had brought in an independent accountancy firm to review its balance sheet and contract profitability, the results of which would be reviewed by PwC.

The company warned that early indications suggested “there may be negative impacts on the balance sheet and/or income statement for current and/or future years”, but refused to clarify which contracts could face revision.

Babcock at the time also ruled out providing any financial guidance for the remainder of its financial year. The news sent its shares down by 18 per cent on the day to 216p. They closed at 257p on Friday.

Lockwood, who ran Cobham before it was acquired by private equity group Advent International, took the helm last September, replacing Archie Bethel, a 16-year Babcock veteran.

He moved swiftly to make his mark on the company, launching a strategic review of its businesses and bringing in a new finance director, David Mellors, also from Cobham, to succeed the retiring Franco Martinelli.

Babcock provides maintenance and support for the UK’s nuclear submarines at Faslane, and was a member of the consortium that built new aircraft carriers.

It has been battling to shore up confidence in its performance ever since an unknown group, Boatman Capital Research, published a list of highly critical claims two years ago including that the company faced “potentially massive exceptional costs”.

Babcock has consistently rejected the claims in the Boatman report, but the allegations wiped millions of pounds off the Babcock’s shares.

Babcock said: “As indicated in our 2019/20 annual report, as planned we ran a process to tender the external audit during the course of this financial year, and as a result have selected Deloitte to be our external auditor for 2021/22, subject to shareholder approval. PwC, having been auditor since 2002, was not invited to participate in the recent tender.”

Analysts have suggested that a rights issue to bolster the balance sheet is looking increasingly likely. Barclays in January suggested a rights issue between £400m-£600m was probable.