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Eddie Stobart lorry on the road AccountingWEB - KPMG and PwC fined over Eddie Stobart audit breaches
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KPMG and PwC fined over Eddie Stobart audit breaches

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Both KPMG and PwC have been fined a combined total of almost £3m over the audit of transport company Eddie Stobart Logistics in 2017 and 2018.

29th Jun 2023
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The accounting watchdog has fined KPMG £877,500, discounted from £1.35m, and PwC £1,990,625, which was also discounted for early admission from £3.5m. 

PwC picked up the larger fine of the two Big Four firms, while the Financial Reporting Council (FRC) singled out KPMG’s “poor disciplinary record” as an aggravating factor in its financial sanction and praised PwC for its “exceptional cooperation”. 

Partners at both firms were also fined and severely reprimanded; PwC’s audit engagement partner Philip Storer was also fined £51,187.50, as was former KPMG audit partner Nicola Quayle who was fined £70,000, but that was reduced to £45,500, with the FRC highlighting her seniority at the point of signing the audit report as an aggravating factor. 

Quayle had already been reprimanded over the audits of Conviviality and Bargain Booze. She has since ceased performing statutory audits as of 2020 and no longer holds a practising certificate, but continues to work with KPMG on a contractual basis. .

KPMG’s audit failings

The fines for the two Big Four firms culminates with what has been a bumpy road for the iconic haulage firm, which saw Eddie Stobart avert collapse in August 2019 when its shares were suspended after PwC discovered a £2m error in the 2018 accounts and the CEO Alex Laffey stepping down. 

KPMG performed the 2017 audit for the supply chain, transport and logistics business, but following a breakdown in relationship with management over obtaining sufficient audit evidence, the Big Four firm resigned.

The breaches the FRC pulled KPMG up on included a failure to obtain appropriate evidence of property transactions Eddie Stobart Logistics entered into and the disclosure of these transactions in Eddie Stobart’s financial statements. The FRC said that “without the profit generated from them, ESL would have been in a loss-making position”. 

KPMG also admitted breaches in the audit work carried out on dilapidations and accounting for a subsidiary company.

PwC’s audit failings 

PwC, who picked up the 2018 audit, was found to have breaches six areas of the audit. 

  • First year of the audit: The FRC found that PwC’s Storer failed to initiate a formal consultation with PwC’s audit risk and quality following the “potentially difficult or contentious matters” that came as a result of KPMG resigning as auditors. 
  • Property transactions: Seeing as KPMG had difficulties in this area, and was one of the reasons for their resignation, the FRC said PwC failed to identify revenue recognition on these transactions as a significant risk of material misstatement. Furthermore, PwC and Storer should have initiated a consultation on the technical aspects of the transactions and failed to challenge management. 
  • Disclosures in the FY2018 on property transactions: The FRC said the disclosures did not adequately explain the impact of the property transactions on Eddie Stobart’s financial performance, and said PwC failed to properly evaluate whether the disclosures were adequate. 
  • Property lease accruals: With Eddie Stobart having entered various property lease agreements where an accrual should have been calculated, the FRC found that PwC failed to design procedures to identify historical leases where no accrual had previously been made. 
  • Dilapidations provision: Sill considering the historical leases, the accounting watchdog said PwC and the partner failed to reach a point where a dilapidations provision should have been considered.
  • Consolidation of investment in a company: Eddie Stobart acquired 50% of the shares in an investee company in 2017 but while PwC concluded that this company should be considered as a subsidiary, the FRC concluded that the Big Four firm failed to properly evaluate whether the haulier controlled the investee company. 

The FRC concluded that there were “numerous, serious and pervasive failings in this audit”. 

“The case highlights the importance of, firstly, the auditor's work in ensuring that disclosures in financial statements enable users to understand the impact of particular transactions on the entity’s financial performance, and, secondly, auditors undertaking formal consultation during the course of the engagement where appropriate,” said Claudia Mortimore, Deputy Executive Counsel.

PwC and KPMG respond

A PwC spokesperson said in a comment: “Our work was not of the required standard on this occasion and for this we apologise. 

We are focused on ensuring the consistent delivery of high quality audits and, in the years since this work took place, the significant and continuous investment we have made in strengthening audit quality has been borne out through improved inspections results.”

Cath Burnet, head of audit at KPMG UK, said: “We are committed to resolving, and learning from, our past cases and regret that elements of our work fell short of required standards in this instance. 

“This development marks another step forward in dealing with these matters, and we continue to invest significantly in audit quality, in our technology and training, to drive further improvements.”

Already this year KPMG has received fines for the audits of arts, crafts and books retailer The Works, as well as LED manufacturers Luceco plc. PwC hasn’t escaped scrutiny of the FRC either, having received a £7.5m fine for the audit of Babcock.

In 2017, when KPMG performed the Eddie Stobart audit, it was ranked as the fourth largest audit firm in the UK, with revenues of £2,172m and 597 audit principals. When PwC was appointed auditors of Eddie Stobart it was the largest audit firm with revenues of £3.764m.

Replies (13)

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By JustAnotherUser
29th Jun 2023 14:03

Imagine being reprimanded over the audits of Conviviality and Bargain Booze, being linked to a third failing but continue to work with KPMG.

Either has a solid golden handshake contract or more likely is a silent hero internally, the fines in relation to fees generated are silly.

mandatory laugh at the existence and terminology of "discounting" a fine.

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Replying to JustAnotherUser:
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By Justin Bryant
29th Jun 2023 14:32

But it's all relative. When the Big 4 are all basically all as bad as each other (which is unsurprising, especially when these fines are just a cost of doing business and in any event effectively get charged to clients via increased oligopoly fees), what does it matter?

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Replying to JustAnotherUser:
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By Hugo Fair
29th Jun 2023 18:09

If anyone wanted a clear insight as to how seriously (not) the Partners take these failings ... one might simply call it the degree of cultural decay that is now endemic ... then look at the clear message they provide to staff:

"Nicola Quayle was fined £70,000, but that was reduced to £45,500, with the FRC highlighting her seniority.
Quayle had already been reprimanded over the audits of Conviviality and Bargain Booze.
She has since ceased performing statutory audits as of 2020 and no longer holds a practising certificate, BUT continues to work with KPMG on a contractual basis."

Wonder how many hours of that contract will need to be worked to clear that fine (especially after they've found a clever way to do so 'tax efficiently')?

The message is clearly designed specifically for internal consumption ... but I don't understand why the press (including Aweb) appears happy to toe the line!

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Replying to Hugo Fair:
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By Postingcomments
29th Jun 2023 21:26

I suppose they toe the line because there is little upside in being too critical vs plenty of potential downside.

Media (like all businesses) is in the business of making money for themselves - not the business of informing you to the best of their ability.

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By ColA
30th Jun 2023 10:00

Clearly a ‘major miss’ in the box-ticking routines!
So glad it’s over 5 decades since I handled a purple pen!
Satisfaction in public & private sector roles from national to local far exceeded audit scope in the 1970s!

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By Akrigg
30th Jun 2023 10:15

Phew - it’s good to know that lessons have been learned from this and that they’ve invested to improve the quality of their auditing. So we’ll definitely not be reading about a slew of similar incidents in the years ahead.

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By johnjenkins
30th Jun 2023 10:16

Isn't it time audits were put out to pasture? They belong to a bygone age that had values and was, in the main, honest. These days audits do not mean an iota. "What do you replace them with?" I hear you cry. Nothing is the answer. There is only one way to deal with large concerns that have multiple links and that is you have a special team at HMRC to investigate (not audit). They could manage 1 every 5 years, so eventually they would all get looked at.

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Replying to johnjenkins:
By Nick Graves
30th Jun 2023 12:28

johnjenkins wrote:

Isn't it time audits were put out to pasture? They belong to a bygone age that had values and was, in the main, honest. These days audits do not mean an iota. "What do you replace them with?" I hear you cry. Nothing is the answer. There is only one way to deal with large concerns that have multiple links and that is you have a special team at HMRC to investigate (not audit). They could manage 1 every 5 years, so eventually they would all get looked at.

If my reading is correct, is this not more to do with your Wicked Uncle FRS fiddling around with disclosure requirements so much that even the Big Four don't understand it, as opposed to a junior not noticing late invoices or somesuch?

Nearly brought poor Stobby down when they panicked.

That may be a rhetorical question, but the answer's deregulation nonetheless.

Maybe everyone ought to use 105 and realise that Limited = trade at your own peril.

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By Marlinman
30th Jun 2023 11:59

Hahahaha ' not of the required standard on this occasion.....'. One of their spokesmen says this nearly every month.

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Replying to Marlinman:
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By johnjenkins
30th Jun 2023 12:39

There's many of these phrases bandied about.
"Your call is important to us"
" Not of the required standard on this occasion"
If you criticise in any way you are deemed to be rude. etc. etc.
I supposed they have replaced -
"the cheque is in the post"
"of course I love you"
can't put the third one in words that won't get me slung off Aweb.

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Replying to johnjenkins:
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By Hugo Fair
30th Jun 2023 15:07

Ah, the unwanted gift.

An old girlfriend once told me her revenge on such ungallantry ... at a suitable point a little later she'd innocently ask a short question of the owner with an inflated ego, consisting only of three two-letter words (commencing with "is it ..")!

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By Husbandofstinky
30th Jun 2023 12:44

Groundhog day yet again be it the big 4, HMRC, the government etc.

Will this eternal loop ever break?

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Replying to Husbandofstinky:
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By johnjenkins
30th Jun 2023 12:55

Get rid and start again. If humans aren't careful that's what nature will do with us.

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