Both KPMG and PwC have been fined by the Financial Reporting Council (FRC) in relation to the statutory audits of the financial statements of Eddie Stobart Logistics plc, a shipping and logistics company based in Warrington, UK. It seems KPMG handed the client off to PwC in 2018 after a breakdown in KPMG’s relationship with ESL management having had a hell of a time obtaining sufficient appropriate audit evidence for the 2017 audit.
In July 2019, ESL announced that a review had been conducted into its prior year financial statements. Following this review, ESL disclosed significant prior year accounting adjustments to the 2017 financial year. Said the FRC, KPMG and engagement partner Nicola Quayle breached Relevant Requirements in some of the areas which were subject to prior year adjustments.
The audit went bad around the following:
- property transactions entered into by ESL, and the disclosure in the financial statements regarding those transactions. These transactions had a
- significant effect on ESL’s financial performance, and without the profit generated from them, ESL would have been in a loss-making position;
- dilapidations; and
- accounting for a subsidiary company.
Regarding the property transactions, auditors failed to obtain sufficient appropriate evidence of services provided by ESL in those transactions to allow revenue to be ascribed to the provision of those services and recognized up-front in the financial year. On top of that, the disclosures in the financial statements relating to the property transactions did not adequately explain the impact of those transactions on ESL’s financial performance.
The failings were serious but not pervasive, said the FRC.
And here’s the pound of flesh:
Against KPMG:
- A financial sanction of £1.35 million, discounted for admissions and early disposal to £877,500. KPMG’s poor disciplinary record was noted as an aggravating factor;
- Non-financial sanctions, comprising:
- a Severe Reprimand;
- a declaration that the 2017 audit report did not satisfy the Relevant Requirements; and
- an order requiring KPMG to take specified actions to prevent the re-occurrence of the contravention.
Against Ms Quayle:
- A financial sanction of £70,000 discounted for admissions and early disposal to £45,500. Notable aggravating factors were Ms Quayle’s seniority at the point of signing the audit report and past disciplinary record;
- Non-financial sanctions, comprising:
- a Severe Reprimand; and
- a declaration that the 2017 audit report did not satisfy the Relevant Requirements.
Engagement partner Nicola Quayle quit performing statutory audits in 2020 and no longer holds a practicing certificate. She has pledged not to carry out statutory audits or sign their reports going forward.
“There were some serious failings admitted in this case; although they were not pervasive throughout the audit,” said FRC Deputy Executive Counsel Claudia Mortimore. “The case highlights the importance of, firstly, the auditor’s work in ensuring that disclosures in financial statements enable users to understand the impact of particular transactions on the entity’s financial performance; and secondly, ensuring that advice received in technical consultations is effectively implemented.”
PwC’s reprimand for their 2018 audit of ESL was a bit less harsh. Both the firm and the engagement partner received sanctions, neither got mentions of poor disciplinary records.
Against PwC:
- A financial sanction of £3.5 million adjusted for the mitigating factor of exceptional cooperation and further discounted for admissions and early disposal to £1,990,625.
- Non-financial sanctions, comprising:
- a Severe Reprimand;
- a declaration that the 2018 audit report did not satisfy the Relevant Requirements; and
- an order requiring PwC to take specified actions to prevent the occurrence of the contravention.
Against Mr Storer:
- A financial sanction of £90,000 adjusted for the mitigating factor of exceptional cooperation and further discounted for admissions and early disposal to £51,187.50.
- Non-financial sanctions, comprising:
- a Severe Reprimand; and
- a declaration that the 2018 audit report did not satisfy the Relevant Requirements.
There were numerous serious failures in relation to PwC’s audit work on ESL’s property transactions, including a failure to identify revenue recognition on those transactions as a significant risk of material misstatement; failing to carry out a formal consultation on the technical aspects of accounting for these transactions; a lack of challenge of management’s selection of accounting policy; and a lack of professional judgement in their work on the transactions. Furthermore, the disclosures in the financial statements failed to adequately explain the impact of the property transactions on ESL’s financial performance.
PwC and Storer assisted in the investigation by making comprehensive early admissions (including admissions relating to matters which were not in the communicated scope of the investigation) for which the FRC gave a discount to the financial sanction of 12.5% (in addition to the 35% reduction for early settlement) to reflect what the FRC describes as exceptional cooperation as a mitigating factor.
ESL almost imploded in December 2019 until saved by an investment of £55 million from shareholder and financier DBay Advisers. A couple months before getting rescued by DBay, ESL’s terrible revenue recognition led to a £2 million accounting error, thus leading the FRC to open inquiries into its two most recent auditors.
Sanctions against KPMG LLP and former audit partner [FRC]
Sanctions against PricewaterhouseCoopers LLP and audit partner [FRC]
