KPMG Faces Nearly $2 Million Fine for Audit Failures: FRC Issues Sanctions

KPMG Faces Nearly $2 Million Fine for Audit Failures: FRC Issues Sanctions

The Financial Reporting Council (FRC) has imposed a substantial fine of nearly £2 million (approximately $2.75 million) for audit failures related to its statutory audit of M&C Saatchi plc for the financial year ending December 31, 2018. The sanctions also extend to Adrian Wilcox, the audit engagement partner involved in the case.

The Final Settlement Decision Notice (FSDN) issued by the FRC under the Audit Enforcement Procedure outlines the sanctions faced by KPMG and Mr. Wilcox. The financial sanction against KPMG initially stood at £2,250,000 but was discounted to £1,462,500 due to admissions and early disposal. In addition to the financial penalty, KPMG faces non-financial sanctions, including a severe reprimand in a published statement and a declaration stating that the audit report signed by KPMG did not meet the necessary requirements.

Mr. Wilcox, the audit engagement partner, is subject to a financial sanction of £75,000, discounted to £48,750, along with non-financial sanctions similar to those imposed on KPMG.

The FRC's investigation was triggered by accounting errors discovered by M&C Saatchi in 2019, leading to a restatement of the FY2018 profit in the FY2019 annual accounts. The audit failings, as detailed in the FSDN, include a lack of professional skepticism in auditing the release of Work in Progress (WIP) credits, insufficient testing of journal entries across subsidiary companies, and a failure to document reasoning related to the retention of rebates under a contract.

The sanctions take into account the challenging nature of the audit and the auditors' efforts to push back the signing date until further evidence was obtained from management. However, the breaches identified were deemed serious and included shortcomings related to UK sub-consolidation adjustments affecting a significant number of stakeholders such as the public, investors, and other market users.

Claudia Mortimore, Deputy Executive Counsel at the FRC, highlighted that KPMG's audit failed to meet the required quality standards, demonstrating serious audit failings and breaches of audit standards. The lack of professional skepticism in critical areas and deficiencies in journal testing were identified as key issues, undermining confidence in statutory audit and the truth and fairness of financial statements.

KPMG has also borne the costs of the investigation. The severity of the sanctions emphasizes the FRC's commitment to upholding audit standards and ensuring accountability in the financial reporting process.

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