The misconduct in the Ted Baker audit rose from KPMG providing expert witness services to the retailer in a commercial court claim. The FRC said this was in breach of ethical standards and meant KPMG was no longer independent in respect of the audits.
Michael Barradell, KPMG’s senior statutory auditor and audit engagement partner, was singled out for the breach and has been given a reprimand and a fine of £80,000.
“In addition,” according to the FRC’s statement, “there was a self-interest threat arising from the fact that the fees for the expert engagement significantly exceeded the audit fees in the relevant years, which KPMG and Mr Barradell also failed properly to consider.”
The £3m penalty was reduced to £2.1m because KPMG settled. However, KPMG will also have to pay £112,000 in costs on behalf of the FRC’s executive counsel. Barradell’s fine was also reduced for settlement and due to mitigating factors.
Commenting on the verdict, the FRC’s executive counsel Claudia Mortimore said: “Ethical Standards are critical in supporting the confidence that third party users can reasonably have in financial statements in circumstances where, of necessity, they only have incomplete information to judge whether the auditor is in fact objective.
“Where those standards are breached such that the auditor’s independence is lost, user confidence is likely to be undermined; the FRC makes clear by these sanctions the seriousness with which such breaches and their consequences are viewed.”
Each member of the Big Four has had its share of ignominious audit failures over the years. But KPMG has particularly struggled, with Carillion being the firm’s nadir. KPMG audited Carillion’s accounts every year since the company’s inception in 1999, receiving £29.4m in fees in the process.
The firm’s struggles has drawn special attention from the FRC. Just last month, the watchdog publicly rebuked KPMG for an "unacceptable deterioration" in the quality of its audit work. The FRC said the KPMG will be subject to closer supervision.
Stephen Haddrill, head of the FRC, said: "At a time when public trust in business and in audit is in the spotlight, the Big Four must improve the quality of their audits and do so quickly.
"They must address urgently several factors that are vital to audit, including the level of challenge and scepticism by auditors, in particular in their bank audits. We also expect improvements in group audits and in the audit of pension balances."
The FRC said it will subject KPMG to extra scrutiny, inspecting 25% more audits done by the firm in the 2018-19 financial year.