Sanctions against KPMG LLP and Anthony Sykes
News types: Investigations
Published: 26 April 2023
This Press Notice concerns the outcome of an investigation into the relevant Statutory Auditor(s). It would not be fair to treat any part of this announcement as constituting or evidencing an investigation into, or findings in respect of the conduct of, any other persons or entities.
The Executive Counsel of the Financial Reporting Council (FRC) has issued a Final Settlement Decision Notice under the Audit Enforcement Procedure and imposed sanctions against KPMG LLP (“KPMG”) and Anthony Sykes, Audit Engagement Partner (and a former partner of KPMG), in relation to the statutory audit of the financial statements of TheWorks.co.uk plc (the “Group”) for the financial year ended 26 April 2020 (the “Audit”).
The following sanctions have been imposed:
KPMG
The Executive Counsel of the Financial Reporting Council (FRC) has issued a Final Settlement Decision Notice under the Audit Enforcement Procedure and imposed sanctions against KPMG LLP (“KPMG”) and Anthony Sykes, Audit Engagement Partner (and a former partner of KPMG), in relation to the statutory audit of the financial statements of TheWorks.co.uk plc (the “Group”) for the financial year ended 26 April 2020 (the “Audit”).
The following sanctions have been imposed:
KPMG
- A financial sanction of £1,750,000, reduced to £1,023,750 to reflect the firm’s co-operation and admissions, and the early disposal of the case;
- A published statement, in the form of a severe reprimand;
- A declaration that the Audit report signed on behalf of the firm did not satisfy the Relevant Requirements; and
- An order requiring the firm to take action to mitigate the effect or prevent the recurrence of breaches of the Relevant Requirements.
- A financial sanction of £75,000, reduced to £43,875 to reflect Mr Sykes’ co-operation and admissions, and the early disposal of the case;
- A published statement, in the form of a severe reprimand; and
- A declaration that the Audit report signed by Mr Sykes did not satisfy the Relevant Requirements.
KPMG and Mr Sykes admitted breaches of Relevant Requirements relating to the audit of inventory existence including the requirements to plan and perform an audit with professional scepticism, to prepare sufficient audit documentation and to design and perform audit procedures in order to obtain sufficient appropriate audit evidence.
KPMG’s approach to the audit of inventory existence was flawed by a succession of failings, such as, in particular:
- Failure to respond appropriately to variances in stock counts identified during controls testing, including by not investigating management’s explanations for those variances and by omitting the test results from the audit file such that the audit file documentation provided a false degree of assurance;
- The adoption of a substantive testing approach (once the controls testing had failed), without adequate consideration or consultation, based on a subset of the same stock count results, from which the stock counts with variances had been removed, as part of a selection process described on the audit file as “random”; and
- Failure to perform appropriate roll-forward and roll-back procedures.
The breaches occurred as part of a course of conduct that critically undermined KPMG’s approach to the audit of inventory existence which, whilst not identified as a significant risk area, remained material to the Group’s balance sheet. The Audit therefore failed in its principal objective of providing reasonable assurance about whether the financial statements were free from material misstatement.
The Final Settlement Decision Notice does not assert that there was a material misstatement in the financial statements. It is not alleged that the breaches were intentional, dishonest, deliberate or reckless.
The extent of co-operation provided by KPMG and Mr Sykes, who also admitted their breaches at an early stage, is reflected in the significant discount applied to the financial sanctions imposed upon them.
Claudia Mortimore, Deputy Executive Counsel, said:
The extent of co-operation provided by KPMG and Mr Sykes, who also admitted their breaches at an early stage, is reflected in the significant discount applied to the financial sanctions imposed upon them.
Claudia Mortimore, Deputy Executive Counsel, said:
“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.“