The U.K. Financial Reporting Council (FRC) separately fined Big Four audit firms PwC and KPMG for deficiencies in their respective work at transport company Eddie Stobart Logistics (ESL).
The penalties, each announced Thursday, included a discounted fine of nearly 2 million pounds (U.S. $2.5 million) against PwC and a reduced fine of £877,500 (U.S. $1.1 million) against KPMG. Each firm received credit for early admissions, though KPMG’s disciplinary record was held against it as an aggravating factor.
Audit engagement partners at each firm were also disciplined. Philip Storer of PwC was assessed a reduced fine of approximately £51,000 (U.S. $64,000) and Nicola Quayle of KPMG £45,500 (U.S. $57,000).
The details: After performing the 2017 audit at ESL, KPMG resigned in 2018 “because of a breakdown in their relationship with ESL’s management, following difficulties in obtaining sufficient appropriate audit evidence.” PwC was appointed for the company’s 2018 audit.
When ESL in 2019 announced a review of its prior year financial statements, it flagged significant adjustments needed regarding both its 2017 and 2018 financials.
Both audits contained failings in work on property transaction disclosures, dilapidations, and accounting for a subsidiary company, according to the FRC. The PwC audit also had deficiencies affecting first-year audit procedures and property lease accruals.
The FRC emphasized the seriousness of the property transaction lapses, as ESL would have been in a loss-making position without the profit generated from the transactions. KPMG was faulted for failing to obtain sufficient appropriate audit evidence of services provided by ESL in the transactions, while PwC failed to identify revenue recognition on those transactions as a significant risk of material misstatement, among other deficiencies.
Firm responses: “Our work was not of the required standard on this occasion and for this we apologize,” said a PwC UK spokeswoman in an emailed statement. “We are focused on ensuring the consistent delivery of high-quality audits and, in the years since this work took place, the significant and continuous investment we have made in strengthening audit quality has been borne out through improved inspections results.”
“We are committed to resolving, and learning from, our past cases and regret that elements of our work fell short of required standards in this instance,” said Cath Burnet, head of audit at KPMG UK, in an emailed statement. “This development marks another step forward in dealing with these matters, and we continue to invest significantly in audit quality, in our technology and training, to drive further improvements.”