The U.K. Financial Reporting Council (FRC) fined Big Four audit firm KPMG approximately 1 million pounds (U.S. $1.2 million) for deficiencies in its work on the 2020 year-end financials of discount retailer TheWorks.co.uk.
KPMG avoided a penalty of £1.75 million (U.S. $2.2 million) for cooperation and early admission, the regulator stated in a press release Wednesday. The firm was ordered to improve its second line of defense function to prevent future breaches of audit requirements.
The FRC also penalized former KPMG Partner Anthony Sykes a reduced £43,875 (U.S. $55,000) for his role in the deficiencies as engagement partner.
The details: The end of The Works’ 2020 financial year came about six weeks after the United Kingdom went into lockdown following the onset of the Covid-19 pandemic, the FRC explained in its decision notice. In March 2020, The Works closed all its retail locations and reduced access to its warehouses.
“These circumstances, including the requirement for remote working, created additional, significant challenges for those involved in the FY2020 audit,” the FRC said.
KPMG’s breaches related to the audit of inventory existence caused by “a succession of failings,” the FRC said. This included failure to respond appropriately to variances in stock counts identified during controls testing, skepticism deficiencies, documentation lapses, and failure to perform appropriate roll-forward and roll-back procedures.
During the audit, Sykes and his team were unable to attend a stock count at a third-party warehouse because of Covid-19 restrictions. This lent to multiple stock count-related breaches, according to the FRC, most notably regarding skepticism toward count confirmation.
“The breaches occurred as part of a course of conduct that critically undermined KPMG’s approach to the audit of inventory existence which, whilst not identified as a significant risk area, remained material to the group’s balance sheet,” said the FRC. “The audit therefore failed in its principal objective of providing reasonable assurance about whether the financial statements were free from material misstatement.”
The FRC did not assert there were material misstatements in the financial statements or that KPMG’s actions were intentional or reckless. The regulator considered the complications caused by the pandemic in assessing the penalties in the case.
Firm response: “We accept that elements of our work for the 2020 audit of The Works did not meet the professional standards required,” said Cath Burnet, head of audit at KPMG UK, in an emailed statement. “Audit quality remains our No. 1 priority, and we continue to invest significantly in training, controls, and technology to drive further improvements.”