KPMG fined £3m for 'serious' Conviviality audit failingsby
KPMG was fined £3m for deficiencies as auditor of the collapsed drinks wholesaler Conviviality. This is second penalty to hit the Big Four firm this week, as the accountancy watchdog took the firm to task for serious audit failings and misleading inspectors.
The Financial Reporting Council (FRC) announced today a sanction against KPMG of £3,010,000. The penalty was discounted by 30% from £4.3m after KPMG’s co-operated with the investigation.
The accountancy watchdog also punished KPMG’s former audit engagement partner, Nicola Quayle. The experienced auditor was fined £80,850 (discounted down from £110,000) and was severely reprimanded.
Quayle, the former head of KPMG Manchester, was at the centre of another FRC sanction against the Big Four firm in 2020. Then, Quayle was fined £45,000 and was told to undertake further training and not handle any statutory audits for two years, while KPMG was fined £455,000. She left the firm in late 2019.
The FRC disciplinary
KPMG’s failings relate to the Conviviality audits for the years to April 2017 and 2018. The FRC found that KPMG failed to obtain sufficient appropriate audit evidence, apply sufficient professional scepticism and adequately document its audit procedures.
In announcing the penalty, the FRC said KPMG’s audit failings spanned multiple financial statements and fell short of auditing standards.
This is the second sanction to hit the Big Four firm this week. Yesterday, news broke that KPMG had settled a £150,000 penalty with the regulator and its auditor Stuart Smith was excluded after he admitted misleading FRC inspections into the audit of Regenersis plc. KPMG also admitted that Smith’s conduct amounted to misconduct.
There were four failings in relation to the 2017 Conviviality audit at the heart of this disciplinary process. The FRC first pulled KPMG up for failing to revise its initial assessment of mistatement risks in the financial statements as more information emerged during the 2017 audit.
Next, KPMG failed to obtain appropriate audit evidence. This included Conviviality’s recognition of £5.9m as accrued franchise licence revenue in FY17, the capitalisation and classification of certain costs and items, and evidence of accrued supplier income.
Then there was KPMG’s failure to apply sufficient professional scepticism and to adequately document its audit procedures.
The Big Four firm also breached the FRC’s revised ethical standard when it failed to document a decision to undertake non-audit services for Conviviality during the 2018 audit.
Claudia Mortimore, the deputy executive counsel to the FRC, said the £3m fine and severe reprimand reflected the seriousness of the failings.
“The audit failings in this case were serious, spanned several significant areas of the financial statements and related to a number of fundamental auditing standards including the requirement to obtain sufficient appropriate audit evidence, apply sufficient professional scepticism, and prepare proper audit documentation” she said.
The two sanctions against KPMG came as the Big Four firm faces more questions during the ongoing Carillion tribunal. Last week KPMG admitted fabricating and forging documents, and misleading the regulator, while blame was pinned on a junior auditor.
Conviviality: The story so far
Conviviality entered administration on 5 April 2018 following a £15m readjustment to forecast earnings. When the drinks group first listed on AIM, it saw rapid growth between 2013 and 2017 through a series of acquisitions and reported an increase in revenue, profit and net assets.
However, the business fell into a death spiral in 2018 when revenue landed 20% short of the expected £70m. AccountingWEB reported at the time that part of the adjusted EBITDA was the result of a material error in the financial forecasts, which was later identified as “a spreadsheet arithmetic error”.
Conviviality ended up having its company’s shares suspected from AIM. After failing to raise further equity it went into administration.
KPMG is not the only Big Four firm to face disciplinary action over the collapse of Conviviality. In July 2020 the FRC fined Grant Thornton £1.95m for 11 adverse findings in 2014, before KPMG took over as Conviviality’s auditor for the year to 30 April 2017.