KPMG fined £1m for The Works audit breaches

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.”