Let’s take a break from what’s going on right now in Ukraine to tell you something we’ve written a lot about in recent years and that we enjoy writing about: KPMG UK being bad at auditing.
While we await KPMG’s punishment for that whole Carillion debacle, the Financial Reporting Council announced on March 8 that it had fined the House of Klynveld £1,250,000 and former KPMG audit director Michael Frankish £50,000 for mishaps in the 2015 and 2016 audits of Revolution Bars, a company that operates a chain of bars in the UK. Because KPMG and Frankish admitted to their failings and cooperated with the FRC investigation, their fines were reduced to £875,000 and £35,000, respectively.
With this latest punishment for shoddy auditing, KPMG has been fined a total of £18,550,000 (reduced to 16,875,000) by the FRC since last August (see Silentnight and Conviviality). You read that correctly: nearly £17 million IN THE LAST SIX MONTHS. Here’s what the FRC had to say about this most recent train wreck of an audit by KPMG:
The failings relate to three specific areas of the Audits: supplier rebates and listing fees; share-based payments; and (for FY2016 only) deferred taxation. The Company’s financial statements for FY2015 and FY2016 contained various misstatements which had to be corrected, some of which arose from the three areas mentioned, and some of which were material to the financial statements as a whole.
Consequently, the Audits failed to achieve their principal objective of providing reasonable assurance that the financial statements were free from material misstatement.
The failings in respect of supplier rebates and listing fees were aggravated by the fact that the FRC had made auditors aware, through publications in 2014 and 2015, that such complex supplier arrangements were an area of particular audit risk and would be a focus of its inspection activity.
In determining the sanctions to be imposed, Executive Counsel has taken into account that these were serious breaches but were not intentional, dishonest, deliberate or reckless, and that the Respondents provided a good level of cooperation during the investigation, including making early admissions in respect of the breaches. In addition, regard was had to Mr Frankish’s good prior disciplinary record and that he was a Director at the time of the work in question and not a partner.
Jamie Symington, Deputy Executive Counsel to the FRC, said:
“KPMG’s failings in this case persisted for two years and across multiple areas. They included complex supplier arrangements which the FRC had previously identified as an area of regulatory focus, albeit that in this case their impact on the financial statements was minor. The audit client was a newly listed and relatively small company, but the breaches were nevertheless serious, including lack of professional scepticism. The FRC has required KPMG and Mr Frankish to take action to mitigate or prevent breaches recurring. The package of financial and non-financial sanctions should help to improve the quality of future audits.”
Frankish, who was the engagement partner for the Revolution Bars audits, left KPMG after 20 years with the firm in 2017 for Grant Thornton where he is currently an audit partner. KPMG was told by the FRC to analyze the underlying causes of the breaches of relevant audit standards, identify and implement any remedial measures necessary to prevent a recurrence, and to update the FRC of its progress.