The U.K. Financial Reporting Council (FRC) this week announced sanctions against KPMG regarding its audits at now-collapsed alcohol retailer Conviviality, in addition to a settlement with the Big Four firm concerning its work at software firm Regenersis.
KPMG received a “severe” reprimand and reduced penalty of 3 million pounds (U.S. $4.1 million) for breaches that arose in its audits of Conviviality’s financial statements for the fiscal years (FY) ended April 30, 2017, and April 29, 2018, the FRC announced Wednesday.
In addition to the fine, KPMG must report to the FRC “identifying the causes of the deficiencies in the 2017 audit and the steps and remedial action which the firm has taken to prevent to reoccurrence of those deficiencies.”
Nicola Quayle, the firm’s audit engagement partner, also received a severe reprimand and was fined a reduced £80,850 (U.S. $110,000).
KPMG and Quayle were assessed initial fines of £4.3 million (U.S. $5.9 million) and £110,000 (U.S. $150,000), respectively, before adjustments for admissions and early disposal.
The FRC said the breaches “were not intentional, dishonest, deliberate, or reckless.” The regulator further acknowledged KPMG and Quayle “provided a good level of cooperation during the investigation.”
Summary details: Following a series of acquisitions, Conviviality grew rapidly and reported significant increases in revenue, profit, and net assets in FY2017. In March 2018, the retailer issued a series of trading updates resulting in its shares being suspended from trading on the alternative investment market of the London Stock Exchange.
An attempt to raise further equity in March 2018 was unsuccessful, and Conviviality entered administration in April 2018.
Audit failures: KPMG and Quayle admitted to multiple failings concerning the 2017 audit, including in their initial risk assessments and documentation of fraud risk. Additionally, according to the FRC, KPMG and Quayle failed to obtain sufficient appropriate audit evidence in relation to:
- Conviviality’s recognition of £5.9 million (U.S. $8 million) as accrued franchise license revenue in FY2017;
- The accounting treatment adopted in respect of a third-party contract for the supply of wine;
- The capitalization of certain costs and classification of certain items as “exceptional,” in accordance with the company’s accounting policy;
- Several items of accrued supplier income; and
- Gaining reasonable assurance the carrying value of the goodwill of each cash-generating unit at Conviviality had not been impaired.
Also cited were further skepticism and documentation lapses. KPMG and Quayle also admitted to documentation failings regarding the FY2018 audit.
“The audit failings in this case were serious; spanned several significant areas of the financial statements; and related to a number of fundamental auditing standards, including the requirement to obtain sufficient appropriate audit evidence, apply sufficient professional skepticism, and prepare proper audit documentation,” said FRC Deputy Executive Counsel Claudia Mortimore in the press release.
“The sanctions reflect the seriousness of the failings,” Mortimore added. “The sanctions also reflect the poor regulatory track record of each of the respondents and are intended to enhance the quality and reliability of future audits.”
KPMG’s response: “I’m sorry that our work wasn’t good enough in this instance,” said Jon Holt, chief executive of KPMG in the United Kingdom. “I am committed to resolving, and learning from, our past cases, and this development marks another step forward in dealing with these matters. We have fully cooperated with the FRC throughout their investigation.
“We continue to invest significantly in our business, taking action to address the FRC’s findings and implementing our audit quality transformation program, which includes comprehensive new training, controls, and technology.”
In a separate matter, the executive counsel of the FRC on Tuesday reached a combined settlement agreement with KPMG and engagement partner Stuart Smith following their admissions of misconduct relating to the regulator’s quality inspection (AQR) of the audit of the financial statements of Regenersis for the period ended June 30, 2014. In September 2021, KPMG and Smith were cited for providing “false and misleading” information during inspections into the firm’s audits of Regenersis.
A disciplinary tribunal was convened then and will determine a penalty amount against KPMG in the case. The hearing is ongoing.
The FRC fined Smith £150,000 (U.S. $204,000) and excluded him from the Institute of Chartered Accountants in England and Wales (ICAEW) for a recommended period of three years.
“Smith has admitted that he made, or was responsible for, representations to the FRC’s AQR inspectors which were misleading and that he was reckless as to whether those representations were misleading and whether the inspectors would be misled by them,” the FRC stated.
KPMG admitted Smith’s conduct amounted to misconduct and that the firm is liable to be sanctioned. KPMG also will pay the FRC’s costs related to the misconduct.
The FRC’s executive counsel noted it made no allegations regarding the quality of the Regenersis 2014 audit and did not allege the financial statements were not properly prepared.
KPMG response: “This misconduct is a violation of our processes and clearly against our values,” Holt said. “It is unacceptable, we do not tolerate or condone it in any way, and I am very sorry that it occurred in our firm. Since this misconduct came to light, we have worked hard and with complete transparency to our regulator to assure ourselves that it does not represent the wider culture or practice of our firm.
“We will continue to assist the tribunal in any way we can, as we have cooperated fully with the investigation into these matters. At the same time, nothing should detract from the frustration that I and my colleagues feel about what has occurred or our determination to ensure that such misconduct will never be repeated at KPMG.”