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Revolution Bar, Newcastle
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​​​​​​​KPMG fined £1.25m for ‘serious’ breaches in Revolution Bars audit

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KPMG has racked up its second seven-figure fine for shoddy work in less than two months, this time for botches in the auditing of bar group Revolution.

9th Mar 2022
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KPMG has been fined £1.25m and hit with a range of sanctions for the substandard auditing of Revolution Bars Group in 2015 and 2016. 

A former director at the Big Four firm, audit engagement partner Michael Neil Frankish, was also fined £50,000, severely reprimanded, and made to undergo developmental training.

Both fines were lowered due to co-operation by the parties involved, with KPMG liable for £875,000 plus the costs of the prosecution legal fees. 

It was ordered to declare its audits fell short of the required standard and made to “analyse the underlying causes of the breaches”. The firm must put remedial measures in place to ensure there is no repeat of the errors and report its progress to the Financial Reporting Council (FRC) at every step.

KPMG said it “regrets” that sections of its 2015 and 2016 audits of the bar chain were riddled with errors and it promised to deal with and learn from its mistakes.

Previous fines

The fine comes less than two months after a £3m penalty for failings in audits of collapsed drinks business Conviviality, which led to a public apology from KPMG’s boss John Holt. It was also fined a near record £13m last year for unacceptable behaviour during the sale of mattress maker Silentnight, and has also swallowed fines for poor audits of Ted Baker, BNY Mellon, Quindell and several others in recent years. 

It has not yet been punished for its role in the controversial collapse of outsourcer Carillion. Such is the level of public and government outrage over the case, which is still being investigated, the potential fine could significantly eclipse any historic sanction levied on the firm. 

In its final notice, the regulator scolded the Big Four firm for its abject performance in recent years, stating it has a “poor disciplinary record”.

‘Particular audit risk’ 

The FRC said the failings of the firm and Frankish related to three main areas of the 2015 and 2016 audits of Revolution, including supplier rebates. This area was highlighted by the FRC prior to the audits as posing “particular audit risk”.

Frankish performed the audits of Revolution’s financial statements from 2014 until he left KPMG in 2016, despite the fact he was not an audit engagement partner at the firm, according to the decision notice. He signed the audit reports for FY2015 and FY2016 in his own name on behalf of KPMG.

Officials found mistakes had been made in regard to listing fees, share-based payments and, within the 2016 statement only, problems linked to deferred taxation. Investigators found incorrect figures had been entered in the audit testing and the flawed information had been repeated within the audit file. 

The 2015 and 2016 Revolution accounts contained “various misstatements”, some of which were “material”, the FRC said.

During the period of suspect accounting, Revolution was listed on the London Stock Exchange in March 2015 at 200p per share. Since then the stock has plummeted nearly 90% to just over 18p. 

Multiple failings

“KPMG’s failings in this case persisted for two years and across multiple areas,” said Jamie Symington, deputy executive counsel to the FRC. “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.” 

Although the audit client was a newly listed and relatively small company, the breaches were “nevertheless serious, including lack of professional scepticism,” Symington said. “The FRC has required KPMG and Mr Frankish to take action to mitigate or prevent breaches recurring.” 

In a statement, KPMG said: “We continue to invest significantly in our business, taking action to address the FRC’s findings and have made significant improvements... including in respect of supplier rebates, share based payments and deferred tax.”

In determining sanctions to be imposed, the FRC said it had taken into account the serious breaches were not intentional, dishonest, deliberate or reckless.

Unconvincing penalties

Some industry watchers were unconvinced by the severity of the penalties.

“If these were serious breaches ‘but were not intentional, dishonest, deliberate or reckless’, what does ‘serious’ mean?” said Mike Masoud, senior director at the American Anti-Corruption Institute (AACI). “Does serious mean ‘negligence’? Does serious mean ‘gross negligence’?  Does FRC expect these sanctions to be a deterrent? I do not think so.”

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Replies (20)

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By Hugo Fair
09th Mar 2022 18:03

So the regulator scolded the Big Four firm for its abject performance in recent years, stating it has a “poor disciplinary record”!

I'm sure they're really upset with that, given the fine is simply swallowed as a 'cost of business' ... and that they can hide behind the fig-leaf of "the serious breaches not (being) intentional, dishonest, deliberate or reckless." So what were they (apart from what one now expects from KPMG)?

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By Justin Bryant
09th Mar 2022 18:11

I must say, I think that's the first time I've seen deferred tax causing a big audit problem. (I used to audit the client's tax charge disclosure in the Big 4 and it's hard to get that materially wrong.)

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By Paul Crowley
09th Mar 2022 22:17

I feel sure that such penalties are cheap as chips compared with the cost of doing a good job on all their clients

Most shoddy work never gets discovered so the commercial decision is: accept the fines on the few that we get caught out on. Move on, nobody cares, we are to big to get a real problem that challenges survival

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By ColA
10th Mar 2022 11:19

Regularity, imprecision, management failures on the part of both auditee & auditor all prompted me to move from professional life in one of the Big 4 to commercial roles many decades ago.
Watchdogs too often became lapdogs.

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By Brend201
10th Mar 2022 11:32

Is the named partner now a partner in Grant Thornton in Manchester or just someone else with the same name? That could be embarrassing.

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By Jason Croke
10th Mar 2022 11:35

Clearly the fines are not acting as sufficient deterrent to get KPMG to improve their audits, training, processes or whatever.

Perhaps the only sanction left is to ban KPMG from doing audits for a period of time, that will then mean clients will have to go to a competitor, although appreciate that in most cases only a Big 5 firm has the resources to do such work.

Maybe not practical but what is absolutely certain is that million pound fines are not improving the quality of work being done, and a fine that does not change behaviour just becomes a cost of doing business, not unlike criminal gangs who just accept the risk of getting caught as just part of the job.

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By rememberscarborough
10th Mar 2022 11:52

Audit reports clearly aren’t worth the paper they’re written on and you’d have to be daft to rely on them. However, why have the directors got away scot free again for the same issue regarding the accounts? Make them fully accountable for “dodgy” accounts and then we might solve this problem.

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By 2TunTed
10th Mar 2022 11:59

In a profession, reputation is everything. Business is business and reputation just another asset (hopefully). At least that is how it used to be. If Audit, tax and accountancy are now just a business then we shouldn't be too surprised by things like this.

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Replying to 2TunTed:
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By unclejoe
10th Mar 2022 14:39

The problem is that we have not addressed the fundamental conflict of interest between company management who want to present the most flattering possible accounts, and auditors who are supposed to ensure that the accounts represent a prudent view of the company. Which reputation do they want to cultivate: prudent, honest and competent, or a willingness to overlook breaches and bend the rules if they can get away with it. I fear it may be the latter, as it is company directors who propose and appoint them.

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By tedbuck
10th Mar 2022 12:58

I don't have too much sympathy for the Big 4/5 and their audit procedures but I think the problem is in what auditors are expected to do and how they are expected to go about it.

Despite what HMRC think digital records are very easy to manipulate and the manipulations difficult to see - so deliberate fraud is going to be difficult to spot.

What is really needed is an on site auditor going into the detail of the business at a level better than superficial. The lady who blew the whistle on Carillion had, I think, been there for about 4 months which really says it all. No auditor will have the time for that.

And yes, I do agree that Directors should accept responsibility for what goes on - surely that is what their very high salaries are for - for them to be custodians not profit skimmers.

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By Paul Crowley
10th Mar 2022 14:04

Big audits are clearly too difficult for big accountancy firms
Time for the NAO to be the sole auditor for public companies

There would be no improvement, but better that the state gets penalised for rubbish auditing and accountants are not tarnished with the KPMG incompetance label

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By paul.benny
10th Mar 2022 18:04

To be fair, the offences in this case took place 5-6 years ago. That so much time has passed before the disciplinary hearing is another issue

Have things changed since then? I'm currently being audited by a firm that's had a fair share of disciplinary cases in recent years and, I'd say yes. They give every impression of doing their detailed work thoroughly and absolutely by the book.

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By paul.benny
10th Mar 2022 18:09

And for all the crowing about big firm failures, we should remember that it's the directors whose deeds and misdeeds are usually causes of company failure. And there is rarely any sanction on directors.

In the US Sarbanes-Oxley focused directors minds by making them criminally responsible - with a risk of jail time - for the financial statements. It's time we had similar legislation here.

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By mrme89
11th Mar 2022 10:55

These stories seem to be a daily occurrence and yet the professional bodies just watch on by.

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Replying to mrme89:
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By paul.benny
11th Mar 2022 12:32

This story is about the professional body fining the guilty parties. Not just watching.

The time delays are usually because there is a need to wait for other investigations or actions to conclude - it 's not necessarily because the professional bodies are tardy in their responses.

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Replying to paul.benny:
By mrme89
11th Mar 2022 13:01

The fine is peanuts to KPMG and won't change their ways.

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By Helen Piper
11th Mar 2022 13:28

Surely a fine would be treated as a charge to Director's Loan accounts, and not a valid business expense?

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By Helen Piper
11th Mar 2022 13:28

Surely a fine would be treated as a charge to Director's Loan accounts, and not a valid business expense?

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By Helen Piper
11th Mar 2022 13:28

Surely a fine would be treated as a charge to Director's Loan accounts, and not a valid business expense?

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By SteveHa
14th Mar 2022 12:07

When one of the big audit firms is fined it is no longer news.

Can we have an article when the big four manage to get through a whole month without being fined, please. That would be news.

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