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KPMG fined over £1m for Luceco audit

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KPMG has added another big audit fine to its penalty pot, after being handed a £1.25m fine for audit breaches in the 2016 financial statements of LED manufacturers Luceco plc. 

13th Apr 2023
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The accountancy watchdog announced this morning that Big Four firm KPMG, along with a Stuart Smith who performed the role of former audit engagement partner (despite being a director), were severely reprimanded and hit with financial sanctions after the 2016 financial statements of Luceco. 

KPMG was originally given a £1.25m fine and Smith a £50,000 fine. The Financial Reporting Council (FRC) reduced the financial sanction by 30% for early admission and early disposal to £875,000 and £35,000. 

Both KPMG and Smith had previous disciplinary records, which, alongside Smith’s relatively junior position with the Big Four firm, were taken into account when assessing the nature and seriousness of the breaches.  

Catherine Burnet, head of audit, KPMG UK, said: “We are committed to dealing with, and learning from, our historical cases and regret that aspects of our 2016 audit of Luceco plc fell short of required standards.

“We continue to invest significantly in training, controls and technology to improve quality and resilience in our audit practice.”

The breaches

The FRC explained that the 2016 financial statement included multiple material misstatements in two areas, where eight breaches of relevant requirements occurred. 

The two areas related to the audit of intercompany transactions and year-end intercompany balances; and the accuracy of the cost of inventory and year-end inventory balances. 

Luceco’s subsidiaries included a production and manufacturing company in China, along with others across Europe and Dubai. It had a large number of transactions between the group’s companies in the 2016 financial year and the FRC said the manner in which these intercompany transactions were accounted for led to material misstatements.  

These included carrying out the reconciliation of intercompany transactions using standalone spreadsheets rather than an automated and integrated process and KPMG auditing the reconciliation using intercompany matrix that didn’t include all of the group intercompany balances. 

These eight breaches across the two areas included failures to design and perform the audit, sufficiently document the audit work, adequately review and critically assess the audit evidence obtained, and exercise professional scepticism in relation to the audit. 

While these breaches only related to one financial year, the FRC said that they extended over the whole of the 2016 financial year audit. The misstatements then had to be corrected and restated in the 2017 financial year. 

The FRC said the breaches were made worse by the fact that the Big Four firm and Smith were already aware of the prior year errors in respect of the accuracy of the cost of inventory and therefore this was one of the areas that needed particular focus in the FY2016 audit.

Disciplinary sanctions

Since the audit, KPMG has introduced a general improvement programme of its audit work and an “audit transformation programme” which it had hoped would reduce the repeat breaches.

In the past four years, the Big Four has faced 12 disciplinary sanctions, with several of these sanctions having concerned errors such as not demonstrating professional scepticism and failing to obtain sufficient audit evidence.  Last year, as reported in the FRC’s annual enforcement review, KPMG received £23.05m pre-discount fines from the accountancy watchdog, which was more than any of its rivals. Meanwhile, as of September 2021, KPMG’s audit fee income was £646m.

In addition to the financial sanction of £875,000 and paying the executive counsel’s costs of the investigation, KPMG is required to analyse the underlying causes of the breaches of Relevant Requirements and whether the firm’s current processes would lead to a different outcome. 

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By Hugo Fair
13th Apr 2023 18:32

A "pre-discount fine" isn't a real thing is it (at least not in the terms indicated by the title)?
If I were to be "handed a £1.25m fine" but the FRC, for whatever reason, reduced the financial sanction by 95% ... then I'd only be concerned with the net £62,500 (not the headline figure).

But my ire (and it's a well exercised hobby-horse by now) is reserved for Catherine Burnet saying: “We are committed to dealing with, and learning from ... continue to invest significantly in ..”
Personally I'd like to see a 100% *increase* in the fine whenever such trite & vacuous, yet hyperbolic, statements are spouted after the event.

'learning from' hoists the most instant red flag for me - as in does the speaker honestly believe that no-one else ever learns anything other than in the aftermath of an almighty c o ck-up? (or are they suggesting they considered sweeping it all under the carpet but generously accept that they were found out so 'will learn' not to be caught next time)?

But all the other weasel words are just as bad - and they don't even make the effort to 'personalise' the message (by saying something specific to the case or their immediate plans).
It's just hot air that is part of the penalty - like being told to pay for the broken window AND write out 100 times "I must try harder not to break windows"!

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Replying to Hugo Fair:
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By AndrewV12
17th Apr 2023 12:31

Should repeat offenders have their fines doubled and trebled .....

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By twohaporth
14th Apr 2023 17:54

And still they carry on auditing - must be profitable. IMHO they are on a hiding to nothing. A sharp computer expert will always be a step or two ahead and how on earth do you spot a really clever fraudster?
I suppose the next audit trend will be AI. But haven't I just heard that AI makes stuff up when it feels like it. Wow - now that really sounds like fun - I think I'm going to be a financial journalist - think of the headlines - "AI found not to be A1"

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By AndrewV12
17th Apr 2023 12:26

Since the audit, KPMG has introduced a general improvement programme of its audit work and an “audit transformation programme” which it had hoped would reduce the repeat breaches.

Another fresh start, how long will it before audit transformation programme is amended/ re launched for further Audit breaches, I suppose its something to hide behind.

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By AndrewV12
17th Apr 2023 12:36

Both KPMG and Smith had previous disciplinary records, which, alongside Smith’s relatively junior position with the Big Four firm,

Junior position, hes a director and Audit engagement partner, sounds to me like he was thrown under a bus, some may say KPMG saw him as a useful idiot.

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Replying to AndrewV12:
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By twohaporth
18th Apr 2023 18:43

I used to work for PMM and often their attitude towards audit problems was ' Make it go away' as long as it doesn't cause waves. Mind you they had their moments - we used to audit a brewery and got beer to drink instead of coffee - certainly made the days pass quicker but I'm not sure the audit was better for it. Still the coffee was pretty vile! Driving home could be a problem as well.

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