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KPMG fined £1m for The Works audit breaches accountingweb

KPMG fined £1m for The Works audit breaches


Coming only weeks after its last sanction, KPMG has been hit with another £1m-plus fine for the audit of the high-street arts, crafts and books retailer The Works. 

26th Apr 2023
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The Financial Reporting Council (FRC) fined KPMG £1,750,000 – which was subsequently reduced to £1,023,750 – and severely reprimanded the Big Four firm after a succession of failings in the audit of discount retailer, The Works. 

The firm was sanctioned alongside audit engagement partner Anthony Sykes, who was also severely reprimanded and was given a £75,000 fine, which was then reduced to £43,875. 

The breaches

Sykes, who had 25 years’ experience as an audit partner at the time of the audit, signed an independent auditors’ report in August 2020 with an unmodified opinion. 

But the accountancy watchdog found that KPMG’s approach to substantive testing was “further and manifestly flawed” and contained numerous basic but serious breaches around the inventory existence in the FY2020 audit of The Works.

Taking place during the Covid-19 lockdown in 2020, the audit contained challenges in carrying out stock count and controls testing. However, the FRC said the conduct of the audit team demonstrated “a serious lack of basic competence”. 

As part of these breaches, KPMG failed to respond appropriately to variances identified in the controls testing of management’s stock counts or investigate management’s explanations for those variances.

The FRC also questioned the audit team’s decision to remove all counts with variances from the stock count population prior to the selection of the substantive testing sample, as part of a selection process described on the audit file as “random”.

The watchdog also raised concern over the omission from the audit file of the results of the controls testing, such that the audit file documentation provided a false degree of assurance.

The audit team also did not perform a roll-forward of all of the stock balances counted from the date of the store counts to the period end date.

Additionally, the audit team was chastised for its adoption of a substantive testing approach when the controls failed without any consideration or consultation, despite variances having been identified in nearly one-third of those counts.

Lack of scrutiny

Sykes was also pulled up in the report for not applying closer scrutiny to the audit team’s work over the stock counts, despite being made aware of performance issues within the team. He also relied on the audit team to bring issues around controls to his attention on their own initiative, but they did not. 

The FRC said these breaches created a risk that the FY2020 financial statements were materially misstated. The fee for the FY2020 audit was £141,000.

At the year end for FY2020, The Works had over 500 stores across the UK and Ireland and held a stock valued at £20.3m. 

Audit breaches ‘should not have occurred’

“The admitted failings, which critically undermined KPMG’s approach to the audit of inventory at a retail entity, were rudimentary and should not have occurred. The financial and non-financial sanctions, which include measures intended to enhance KPMG’s second line of defence function, are aimed at preventing a repetition of such failings in the future,“ said Claudia Mortimore, deputy executive counsel at the FRC.

In addition to the financial sanction, KPMG has been ordered to undertake a programme to review the effectiveness of its second-line defence function and put in place additional supervision of the future audit work of two audit team members. KPMG also has to pick up the executive counsel’s costs of £198,430.64. 

Poor disciplinary record

The announcement of this sanction comes only a few weeks after KPMG was fined £1.25m, which was reduced to £875,000, for its audit of LED manufacturer Lucedco

Sykes, the former KPMG audit partner, has also faced disciplinary action from the accountancy watchdog, after having been given a £112,000 sanction for his role in the audit of aerospace manufacturer Rolls-Royce.

KPMG has frequently appeared on the FRC’s disciplinary pages, and in the financial settlement report with its most recent sanction, the watchdog highlighted the Big Four firm’s “poor recent disciplinary record” and the fact it’s been sanctioned 10 times since 2019. 

Included in these recent audit failings are Conviviality, Revolutions Bars Group and, the most high profile, the collapse of Carillion

Last year, the FRC revealed that of the £46.5m fines handed to accountancy firms for mostly audit failings, KPMG picked up £23.05m of them. 

At the time of the breach, the audit fee income of KPMG in 2021 was £646m with a total fee income of £2.433bn. 

Following the audit of The Works, the FRC noted that KPMG has implemented remedial measures. Catherine Burnet, head of audit, KPMG UK, said: “We accept that elements of our work for the 2020 audit of The Works did not meet the professional standards required. Audit quality remains our number one priority and we continue to invest significantly in training, controls and technology to drive further improvements.”


Replies (14)

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By Justin Bryant
26th Apr 2023 13:24

Just a cost of doing business basically (that is not even a cost as it's recovered one way or another in higher monopoly/oligopoly fees etc.)

Thanks (4)
By Hugo Fair
26th Apr 2023 14:13

"Audit quality remains our number one priority" ... I'd hate to measure their performance against whatever they see as lower priorities!

But who cares (certainly not KPMG)? If that's the FRC "severely reprimanding" them, then where's the sign of any pain inflicted (on individuals or on future business)?

The litany of non-performance is best illustrated by:
* The FRC also questioned the audit team’s decision to remove all counts with variances from the stock count population prior to the selection of the substantive testing sample, as part of a selection process described on the audit file as “random”.

You can see the scene ... "I don't like all these counts with variances - has anyone got any counts that seem true?" "Oh lovely, we'll focus on those ones then." "So don't forget to tell everyone ... only randomly pick samples from this pile of pre-approved counts."

Fitting the data to suit your preordained hypothesis is the antithesis of good behaviour ... in science, in general life and most certainly in audit!

Thanks (8)
By ColA
27th Apr 2023 09:29

My decision to relinquish ‘professional office’ life permanently in 1972 totally vindicated.
Even then, having spent two years with a provincial office of one of the Big 4 it was clear that lazy managers, indolent seniors & predecessors whose creativity in completing permanent files was legion - some aspiring later to the realms of academia - it was clear that audit standards were rock bottom.
Auditing FTSE-100 listed companies or FRSA rigour was absent & the ‘time-budget’ sacrosanct to provincial partners nursing the gravy train.
Cynical, maybe, but never a moment’s regret in the real commercial world.

Thanks (2)
By andrew1211
27th Apr 2023 09:49

Costs £198k fgs!

Thanks (0)
By anthonystorey
27th Apr 2023 10:16

These big accountancy firms provide a useful revenue stream for the government so we should welcome their ineptitude.

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By tedbuck
27th Apr 2023 10:16

The answer to this problem is to tighten up on audit procedures so let's make the small auditor's life a misery - after all there's not much we can do with the big 4, except fine them, of course, but, at least, we'll be seen to be doing something and the fines are excellent income plus £198 k costs - mmmm nice one!

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27th Apr 2023 10:45

What is it going to take for someone, somewhere to say " Right that's it ! KMPG can no longer carry out audit work " ?
I mean, fgs, it’s been sanctioned 10 times since 2019 and been fined more than £46 million.

Thanks (3)
Replying to FD-HBC:
Pile of Stones
By Beach Accountancy
02nd May 2023 21:46

Yes, but the work would just go to the other Big 3, who are just as bad.

Thanks (0)
By JustAnotherUser
27th Apr 2023 10:59

hope they got a "discount" for paying early, wouldn't want to leave them out of pocket

Thanks (1)
By mkowl
27th Apr 2023 11:10

I think like many you consider the proportionate response to these failings compared to the book thrown approach to those in sole practice interesting to observe at times

I guess the ability to afford the lawyers representing makes a bit of a difference

i can see in maybe 20 years time the ICAEW splitting

Thanks (1)
Stuart Walker Yellow Tomato Copy
By winton50
27th Apr 2023 12:00

Let's be honest, KPMG and all the big firms just see these fines as a cost of doing business.

Until the sanctions have real teeth then they will continue to simply add 10% on to every client's bill and then use that to pay the inevitable fines.

The funny thing is that the big firms only take "the best" from university. It seems that this is a flexible definition of best.

Thanks (1)
Replying to winton50:
By SkyBlue22
09th May 2023 12:54

"Best" means nothing without appropriate training and management.

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By AndrewV12
27th Apr 2023 12:20

'The firm was sanctioned alongside audit engagement partner Anthony Sykes, who was also severely reprimanded and was given a £75,000 fine, which was then reduced to £43,875. '

So KPMG found useful idiot in A Sykes, so who's the next cab of the rank to fill his shoes.

Part of me thinks sooner or later one of the big four will make such a large error it will wipe them out and part of me thinks they keep going and will continue to for the foreseeable future.

Thanks (0)
Replying to AndrewV12:
Pile of Stones
By Beach Accountancy
02nd May 2023 21:48

Arthur Andersens went under and after a couple of years nobody noticed...

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