Audit Failings Land KPMG & Partner in Hot Water with Regulator

Key Takeaways

• FRC Enforcement: The Financial Reporting Council sanctioned KPMG LLP and audit partner Anthony Sykes for serious breaches in the 2022 audit of N Brown Group.
• Audit Failures: Shortcomings spanned impairment model design, cash flow forecasts, discount rates, and sensitivity analysis, despite impairment being identified as a significant risk.
• Penalties Reduced: KPMG was fined £710,937.50 and Sykes £51,187.50, both reduced for early settlement and exceptional cooperation.
• Severe Reprimands: Both received severe reprimands and formal declarations that the FY22 audit report failed to meet professional standards.

Deep Dive

The UK’s audit watchdog has sanctioned KPMG and one of its senior partners, Anthony Sykes, for serious lapses in their 2022 audit of online retailer N Brown Group.

The Financial Reporting Council’s Executive Counsel issued a Final Settlement Decision Notice after KPMG and Sykes admitted to multiple breaches of international auditing standards on impairment testing. At the heart of the issue was whether N Brown’s assets were properly tested for impairment at a time when the company’s market value was significantly below its net assets, a clear red flag under International Accounting Standard 36.

The FRC found that the audit team’s work was flawed across the board. Problems ranged from the way the impairment model was designed, to the assumptions used in cash flow forecasts and discount rates, to sensitivity analysis and even reconciliation to the company’s market capitalization.

Despite impairment being flagged as a key audit matter and a significant risk, the FRC concluded that the diligence and judgement required were simply not there. The inadequate work meant headroom in impairment testing was overstated, though the regulator made clear that N Brown’s financial statements themselves remained fair and accurate, and no impairment was required for FY22.

KPMG and Sykes both received financial penalties, reduced for what the FRC described as “exceptional cooperation” and early admissions.

• KPMG: fined £710,937.50 (down from £1.25 million), issued with a Severe Reprimand, and a formal declaration that its audit report did not meet standards.
• Anthony Sykes: fined £51,187.50 (down from £90,000), given a Severe Reprimand, and issued the same declaration.

On top of that, KPMG will foot the bill for the FRC’s investigation.

Jamie Symington, the FRC’s Deputy Executive Counsel, did not hold back, “In this case, there were numerous failings in relation to the audit work on impairment, despite it having been identified as a significant risk. This case demonstrates that the audit of impairment requires a substantial level of diligence, forethought, and careful exercise of judgement.”

Still, Symington acknowledged that both KPMG and Sykes went further than most in cooperating with the probe, carrying out self-reviews that helped identify breaches and taking remedial steps to prevent a repeat. That effort, he said, saved both time and costs in the investigation.

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