As the UK’s audit cops are kicking back and watching KPMGers throw each other under the bus and a former audit partner feign ignorance about documents being forged during a tribunal hearing on the clown show that was the firm’s auditing of Carillion, the Financial Reporting Council decided to give KPMG a small taste of the large punishments the firm will almost certainly receive at the conclusion of the hearing.
The hearing, which began last week and is expected to last through the end of the month, is not only detailing the major screw-ups and misconduct by KPMG and its auditors during the firm’s 2016 audit of Carillion, the construction and services company that collapsed nearly four years ago, but also failures in KPMG’s 2014 audit of Regenersis, an IT software company.
Stuart Smith, who was the audit engagement partner for Regenersis, was supposed to be one of six ex-KPMG auditors who would testify during the course of the hearing. But Smith recently reached a settlement with the FRC. The audit cops issued this statement on Smith’s punishment on Tuesday:
The Executive Counsel to the Financial Reporting Council (FRC) has agreed terms of settlement with KPMG and Stuart Smith following their admissions of Misconduct in relation to the FRC’s Audit Quality Review (AQR) inspection of the audit of the financial statements of Regenersis plc for the financial year ended 30 June 2014 (“Regenersis 2014 Audit”).
Mr 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.
Mr Smith has admitted that his conduct in making or being responsible for the representations fell significantly short of the standards reasonably to be expected of a Member and was contrary to the ICAEW’s Code of Ethics Fundamental Principle of Integrity.
KPMG has admitted that Mr Smith’s conduct amounted to Misconduct, and that the firm is liable to be sanctioned in this respect.
Sanctions imposed on Mr Smith are as follows:
a. Exclusion from the ICAEW for a recommended period of three years; and
b. A financial sanction of £150,000
In the settlement agreement, the FRC said the misconduct “put at risk the regulator’s ability to protect the public, maintain public and market confidence in the regulatory regime and in the standards and conduct of members, and deter breaches;” that is was “plainly very serious;” and that it “involved a breach of the fundamental principle of integrity and was reckless.” However, the FRC also said Smith’s misconduct “was not dishonest;” that it “was isolated, not repeated, and took place over a short period of a matter of days;” and that it “did not involve or cause or put at risk the loss of money.”
Then earlier today, the FRC put out a news release announcing it was taking KPMG and a different audit engagement partner to the woodshed, this time for botching the audit of failed British beverage wholesaler Conviviality, which is unrelated to what is being discussed at the tribunal hearing. Here’s what we wrote in July 2018 when the FRC announced it had started a probe regarding KPMG’s auditing of Conviviality:
[T]he FRC is probing KPMG’s audit work for Conviviality for the year ended April 2017, even though the accounting irregularities that the beverage company admitted to occurred in its 2018 financial year, the Financial Times wrote.
The FRC said it also was investigating an unnamed member of the Institute of Chartered Accountants in England and Wales over the “preparation and approval of Conviviality’s financial statements and other financial information.”
We’re not sure if that unnamed member of the ICAEW was Nicola Quayle, but Quayle was the KPMG audit engagement partner for the Conviviality audit, and she got reprimanded and fined £80,850 by the FRC today. KPMG was fined £3 million by the FRC after admitting to a slew of failures in the 2017 Conviviality audit, including:
1. A failure to revise, in light of information obtained during the 2017 Audit, their initial assessment of the risks of material misstatement to the financial statements, to design and perform audit procedures responsive to the risks of material misstatement due to fraud, and adequately to document their audit procedures in respect of the risk assessment and fraud risk assessment.
2. A failure to obtain sufficient appropriate audit evidence:
a. relation to the recognition by Conviviality of £5.9m as accrued franchise licence revenue in FY17;
b. in relation to the accounting treatment adopted in respect of a third-party contract for the supply of wine;
c. in relation to the capitalisation of certain costs and the classification of certain items as exceptional, in accordance with the Company’s accounting policy;
d. in relation to several items of accrued supplier income; and
e. in order to gain reasonable assurance that the carrying value of the goodwill of each cash-generating unit in the Conviviality group had not been impaired.
3. A failure to apply sufficient professional scepticism in relation to the recognition of accrued franchise licence revenue, the accounting treatment adopted in relation to the third-party wine supply contract, and in the course of performing their audit procedures in relation to goodwill impairment.
4. A failure adequately to document their audit procedures in a number of these areas.
The fines for KPMG and Quayle were reduced from £4.3 million and £110,000, respectively, because they admitted their wrongdoings.
Quayle has gotten her wrist slapped by the FRC before. When KPMG was fined £455,000 in April 2020 for failing to obtain and document sufficient audit evidence in relation to supplier-funded rebates during the audit of an unnamed client, she was fined £29,000 for her failure to apply sufficient professional skepticism or obtain and document sufficient appropriate audit evidence. Quayle, who was a senior partner at KPMG’s Manchester office, retired from the firm last November but continues to work on internal projects for the firm on a contract basis, the Financial Times reported.