Another day, another Financial Reporting Council fine for KPMG. This time it is related to their audit of TheWorks.co.uk, a discount retailer specializing in arts, crafts, toys, books, stationery, and perpetual fire sales of various cheap stuff with which to clutter your domicile and desk drawers.
On Wednesday, the FRC announced sanctions against KPMG and lead engagement partner Anthony Sykes in relation to the audit The Works for the financial year ended April 26, 2020.
What did they do? Inventory got ’em. KPMG and Sykes admitted to breaches (the word FRC uses for “fuck ups”) relating to the audit of inventory existence including the requirements to plan and perform an audit with professional skepticism, to prepare sufficient audit documentation and to design and perform audit procedures in order to obtain sufficient appropriate audit evidence.
KPMG’s approach to the audit of inventory existence was flawed by a succession of failings, such as, in particular:
Failure to respond appropriately to variances in stock counts identified during controls testing, including by not investigating management’s explanations for those variances and by omitting the test results from the audit file such that the audit file documentation provided a false degree of assurance;
The adoption of a substantive testing approach (once the controls testing had failed), without adequate consideration or consultation, based on a subset of the same stock count results, from which the stock counts with variances had been removed, as part of a selection process described on the audit file as “random”; and
Failure to perform appropriate roll-forward and roll-back procedures.
The FRC gives naughty auditors a discount on fines if they cooperate and admit fault so both parties got a bit of a break. Of the £1,750,000 financial sanction, KPMG will pay £1,023,750 (approx. $1.3 million USD) and lead engagement partner Sykes will pay £43,875 of the original £75,000 sanction to to reflect his cooperation and admissions.
Both Sykes and the firm are required to provide a signed declaration that the audit report did not satisfy relevant requirements and the firm is expected to take actions with the intent of preventing this from happening again.
“The admitted failings, which critically undermined KPMG’s approach to the audit of inventory at a retail entity, were rudimentary and should not have occurred,” said Claudia Mortimore, Deputy Executive Counsel at the FRC. “The financial and non-financial sanctions, which include measures intended to enhance KPMG’s second line of defense function, are aimed at preventing a repetition of such failings in the future.”