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KPMG UK Going For a FRC Penalty High Score Again This Year

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Announced Monday, the Financial Reporting Council (FRC) has fined the King’s KPMG £2,250,000 ($2.9 million USD) for their 2018 audit of British ad agency M&C Saatchi. Why? Because fuck ’em, that’s why!

It all started when the client discovered accounting errors and restated its FY2018 profit in the FY2019 annual accounts. This prompted a FRC investigation into the audit which led them to dig into revenue recognition, journal entries, and the year-end consolidation process.

KPMG and lead engagement partner Adrian Wilcox admitted breaches of relevant requirements in these areas:

  • A failure to audit with sufficient professional scepticism the release of WIP credits (a type of client payment on account), which increased revenue by £1,200,000. These releases, processed as UK sub-consolidation adjustments, were subsequently reversed in the FY2019 annual accounts.
  • Failures to properly audit journal entries across a number of subsidiary companies, including a lack of any journals-testing at all for two subsidiaries, and a failure to identify potentially high-risk journals for testing across a number of entities.
  • A failure to document the auditors’ reasoning, or complete their enquires with management, in relation to the retention of rebates under a contract which, on its face, appeared to require such rebates to be passed back to a client. The level of professional scepticism was insufficient.

The FRC acknowledges it was a “challenging” audit and that “the auditors demonstrated some robustness in pushing back the signing date until they obtained further evidence from management.” However, the FRC said, “the breaches of relevant requirements included serious failings and, specifically, breaches relating to UK sub-consolidation adjustments affecting or potentially affecting a significant number of people in the United Kingdom such as the public, investors, or other market users.”

Taken together, the breaches undermine confidence in statutory audit and the truth and fairness of financial statements, wrote the FRC in the press release.

For the fiscal year ended March 2022, UK audit firms were fined a record £46.5 ($59.2 million USD) by the FRC, more than half of that was levied against KPMG alone. 2023 saw £40.4 million in penalties — including investigation costs paid by the firms — and KPMG was at the center of four out of five concluded FRC investigations. They also earned the highest fine ever recorded by the FRC for their work on collapsed construction company Carillion. The £21 million ($26 million USD) fine was a mere £8 million more than the £29 million Carillion paid in audit fees over 19 years.

Sanctions against KPMG LLP and audit partner [Financial Reporting Council]