KPMG and PwC fined over Eddie Stobart audit breachesby
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.
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.