FRC fines KPMG, partner over Conviviality audit failures
The Financial Reporting Council has imposed sanctions against KPMG and audit partner Nicola Quayle, it announced on Wednesday, over the company’s audits of failed drinks business Conviviality for the 2017 and 2018 financial years.
A financial sanction of £4.3m, discounted 30% to £3.01m for admissions and early disposal, was handed to KPMG, alongside a “severe reprimand”, a declaration that the audit did not satisfy requirements, and a non-financial sanction requiring KPMG to report to the FRC identifying the causes of the deficiencies in the 2017 audit, and the steps and remedial action taken to prevent them reoccurring.
The independent regulator handed a financial sanction of £0.11m to Quayle, adjusted upwards by 5% for aggravating factors and discounted 30% for admissions and early disposal to £80,850, as well as a “severe reprimand”.
Alcohol supplier and retailer Conviviality listed on AIM in July 2013, and between 2013 and 2017 it grew rapidly through a series of acquisitions.
In the 2017 financial year, it reported significant increases in revenue, profit and net assets, but in early March 2018, it issued a series of trading updates which resulted in its shares being suspended from AIM.
An attempt to raise further equity in March 2018 was unsuccessful, and Conviviality entered administration on 5 April 2018.
The 2017 financial year was the second year that KPMG had conducted Conviviality’s audit.
According to the FRC, the failings admitted by the respondents in relation to that year’s audit included a failure to revise, in light of information obtained during the audit, their initial assessment of the risks of material misstatement to the financial statements, to design and perform audit procedures responsive to the risks of material misstatement due to fraud, and to adequately document their audit procedures in respect of the risk assessment and fraud risk assessment.
They also included a failure to obtain sufficient appropriate audit evidence in relation to the recognition by Conviviality of £5.9m as accrued franchise licence revenue in 2017, in relation to the accounting treatment adopted in respect of a third-party contract for the supply of wine, in relation to the capitalisation of certain costs and the classification of certain items as exceptional in accordance with the company’s accounting policy, in relation to several items of accrued supplier income, and in order to gain reasonable assurance that the carrying value of the goodwill of each cash-generating unit in the group had not been impaired.
The respondents also admitted to a failure to apply sufficient professional scepticism in relation to the recognition of accrued franchise licence revenue, the accounting treatment adopted in relation to the third-party wine supply contract, and in the course of performing their audit procedures in relation to goodwill impairment.
A failure to adequately document their audit procedures in a number of those areas was also highlighted by the FRC.
The regulator said the admitted failings in the 2018 audit concerned failures to document the decision to prepare a financial position and prospects procedures report to Conviviality during the audit period, which breached the FRC’s Revised Ethical Standard 2016.
It said the breaches of the relevant requirements were not intentional, dishonest, deliberate or reckless, and it acknowledged that the respondents provided a “good level of cooperation” during the investigation.
“The audit failings in this case were serious, spanned several significant areas of the financial statements and related to a number of fundamental auditing standards including the requirement to obtain sufficient appropriate audit evidence, apply sufficient professional scepticism, and prepare proper audit documentation,” said the FRC’s deputy executive counsel Claudia Mortimore.
“The sanctions reflect the seriousness of the failings.
“The sanctions also reflect the poor regulatory track record of each of the respondents, and are intended to enhance the quality and reliability of future audits.”