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FRC hit firms with £40m in audit fines last year

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Large accountancy firms racked up fines of £40.5m in the year 2022/23, with KPMG receiving the highest-ever sanction of £20m for the audit of Carillion and Regenersis. 

27th Jul 2023
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KPMG topped the financial sanctions league table with a £20m Carillion/Regenersis fine, while the accountancy watchdog dished out 12 other sanctions over the course of the year. 

The Financial Reporting Council (FRC) said in its annual enforcement review that in total the combined sanctions imposed was £40.5m, which ended up being £28.5m after settlement discounts. 

Although this year’s crop of sanctions included the highest ever, it was still less than last year’s £46.5m (£34.6m after settlement discounts). 

Record fine

The biggest fine came in May 2022 when an independent tribunal imposed a £20m sanction on Big Four firm KPMG for providing false and misleading information and documents to the FRC during the two audits of Regenersis and Carillion. 

The tribunal found the conduct of a KPMG partner and three employees of the firm was “dishonest”, while a KPMG employee performing the role of audit engagement partner on the Regenersis audit admitted that his representations to the FRC’s audit quality review inspectors was “reckless”.  

While KPMG’s record-setting fine for the Carillion/Regenersis audit led the sanctions this year, PwC’s attracted the highest sanction for its audit of Babcock International Group. 

Notable fines in 2022/23

The other notable audit sanctions this past year were: 

Audit firm

Audit

Fine (discounted settlement)

PwC

Babcock International Group (FY2017 and FY2018) 

Devonport Royal Dockyard Limited (FY2018)

£7.5m (5.625m)

PwC

BT Group plc (FY2017)

£2.5m (£1.75m)

PwC

Eddie Stobart (FY2018)

£3.5m (£1.9m)

KPMG

Eddie Stobart (FY2017)

£1.35m (£877,500)

KPMG

The Works 

£1.75m (£1.02m)

The accountancy watchdog hailed this as a record year after concluding 19 cases – the highest number of cases concluded in a year – with 11 ending in settlements and one decided by an independent tribunal. This is up from the 17 recorded in 2021/22. 

The other cases that concluded with a sanction included UHY Hacker Young’s audit of Laura Ashley Holdings plc (FY21018 and FY2017), Deloitte’s audit of SIG plc (FY2015 and FY2016), and KPMG’s audit of Luceco (FY2016). 

In addition to the financial sanctions, the annual enforcement review reported that there were 49 non-financial sanctions imposed, with 19 of those being severe reprimands. This is down compared to 2021/22 where there were 62 non-financial sanctions and 25 of those were severe reprimands. 

Recurring themes

The FRC flagged a number of recurring themes in the audit investigations. These ranged from audit firms displaying a lack of scepticism, insufficient audit evidence, audit planning, and a lack of audit documentation. 

Three of the audit failures related to the audit of inventory, these being KPMG and The Works, UHY and Laura Ashley, and KPMG and Luceco. In the case of KPMG’s audit of The Works, for example, the watchdog highlighted problems with the way the audit team documented its testing of the existence of inventory, particularly around controls testing, not recording the controls test results and using a skewed rather than random sample. 

Looking ahead

The FRC also revealed that eight audit enforcement procedures are currently underway: 

  • Mazars’s audit of Studio Retail Group for the FY2021
  • EY’s audit of  Stirling Water Seafield Finance plc for the FY2019
  • Shipleys’ audit of the consolidated statements of Zaim credit system for the FY2021
  • PwC’s audit of the consolidated statements of Intu properties
  • KPMG’s audit of the consolidated statements of Carr’s Group
  • EY’s audit of Made.com for FY2021
  • Deloitte’s audit of Joules Group plc for FY2021.

Elsewhere, the FRC looked ahead at some of the upcoming trends. This included the demand for reliable and useful environmental, social and governance (ESG) information. The report noted that sustainability-related issues are becoming increasingly significant to investment decisions and how ESG risks and opportunities may affect companies’ financial position. 

FRC and timeliness

In the report’s forward, Elizabeth Barrett, the FRC’s executive counsel, noted that this year saw the highest number of investigations concluded in a year and hailed the department’s year-on-year improvement in timeliness, with 75% of investigations meeting the FRC’s published key performance indicators. 

Responding to the financial sanctions, she said: “We continue to see a strong and growing commitment to insight, self-improvement and in the readiness of parties to identify and address errors, to report them to us candidly and to admit them. 

“Such an approach is consistent with the high standards and high quality rightly to be expected from both the preparers and the auditors of financial statements so that investors and other stakeholders can have a high level of assurance that financial statements are accurate and meaningful. It also assists in delivering timely outcomes.”

She added that the FRC incentivises cooperation and this includes settlement discounts ranging from 25 to 43%.

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Replies (9)

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the sea otter
By memyself-eye
27th Jul 2023 18:23

Auditors are incompetent, Banks are 'woke' ministers 'dither' HMRC is 'not fit' our beloved NHS is 'broken' The list goes on.

Only Nigel can solve our woes.

.. and that last comment wasn't said in jest.

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By ColA
28th Jul 2023 09:54

Some might say that with Thatcher the late Nigel was the instigator of many of the country’s ills.

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By sigonella
28th Jul 2023 10:33

Wrong Nigel I think

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By Hugo Fair
27th Jul 2023 18:44

"The accountancy watchdog hailed this as a record year" ... demonstrates a somewhat skewed view of priorities.

It is understandable that success (whether or nor true) within the parameters of their operational metrics should be hailed (even celebrated) internally, for boosting staff morale.
But for general public consumption the message should be a coruscating denunciation (with examples) of the audit 'industry' that is bringing British business into disrepute - not 'hailing' it!

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Replying to Hugo Fair:
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By flightdeck
28th Jul 2023 15:26

This is not a success. Success is firms not needing to be fined. It's like IT infrastructure - you don't reward people on the number of Sev 1's they fix you reward them for there not being any Sev 1's in the first place.

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By rakboy
28th Jul 2023 10:56

£40.5m fines. Who receives them? Are they taxable? Are accounts prepared showing annual income from fines? Are they public documents? Just asking.

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By grantth
28th Jul 2023 11:14

It is hard to believe that FRC could be proud of this record. There are many situations where auditors are required to make judgments, where audit evidence is incomplete or confusing. If the issue is significant, the simple solution would be to not offer an audit opinion. However, that would be unacceptable to clients. Could it be that auditing standards are also at fault?
I certainly agree that these cases undermine public confidence in the audit profession generally and audit opinions specifically. If that is what FRC is trying to achieve, they could claim to have succeeded.

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By farrcorfe
28th Jul 2023 14:51

Having spent a few years auditing I found that the 'audit programs' were out of date and often irrelevant. Perhaps properly understanding how your client's business works and using common sense would make the audit more robust. And as for not providing an audit opinion - well, if the client objects then the question of independence and so on raises its (important) head

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Replying to grantth:
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By flightdeck
28th Jul 2023 15:28

That's an interesting point Grant, they should be allowed to say to the client "unless we can clear up X, Y then we are not going to grant an opinion". I get that clients won't like it but then they will have to sort out their X and Ys. ??

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