Big Four audit firm KPMG and one of its former directors were disciplined by the U.K. Financial Reporting Council (FRC) regarding eight admitted breaches of relevant requirements in their fiscal year 2016 work at lighting and wiring product distributor Luceco.
KPMG agreed to pay a reduced penalty of 875,000 pounds (U.S. $1.1 million) and launch a full analysis of whether the firm’s current processes are designed to prevent recurrence of the breaches, which related to intercompany transactions and year-end intercompany balances and accuracy of the cost of inventory and year-end inventory balances, according to the FRC’s press release Thursday. The firm avoided a £1.25 million (U.S. $1.57 million) fine after admissions and early disposal.
Stuart Peter James Smith, a former KPMG director who served as engagement partner on the Luceco audit, was fined a reduced £35,000 (U.S. $44,000).
The details: Luceco listed on the London Stock Exchange in 2016, which meant its FY2016 financials needed to account for its now being a public interest entity.
KPMG was aware from the company’s previous year audit it had identified prior period errors in relation to inventory that had to be restated, according to the FRC’s final decision notice. The audit team identified significant risks during their FY2016 work included recognition of revenue and related liabilities, management override of controls, capitalization of development costs, and valuation of the group’s inventory.
“Neither intercompany balances nor the accuracy of the cost of inventory were identified as giving rise to significant risks of material misstatement,” said the FRC. Yet, KPMG and Smith erred in these areas because of failures in the design and performance of audit procedures, review and assessment of audit evidence obtained, documentation of audit work, and application of professional skepticism.
As a result, Luceco’s FY2016 financials included multiple material misstatements regarding intercompany balances and inventory costs that were restated in FY2017.
KPMG response: “We are committed to dealing with, and learning from, our historical cases and regret that aspects of our 2016 audit of Luceco plc fell short of required standards,” said Cath Burnet, head of audit at KPMG UK, in an emailed statement. “We continue to invest significantly in training, controls, and technology to improve quality and resilience in our audit practice.”