KPMG Sanctioned for Independence Breaches in Carr’s Group Audit

Key Takeaways

• Sanctions Imposed on KPMG and Nick Plumb: KPMG and audit partner Nick Plumb were penalized for breaching independence requirements in the FY21 Statutory Audit of Carr’s Group plc.
• Financial Penalties: KPMG was fined £690,625, and Plumb received a £38,675 penalty, both reduced due to their cooperation in the investigation.
• Independence Breach: KPMG relied on Firm X's audit work despite violations of independence rules, including exceeding the five-year tenure of the audit partner and providing non-audit services.
• Non-financial Sanctions: Both KPMG and Plumb received severe reprimands, and KPMG was required to review audits involving external auditors to ensure future compliance.

Deep Dive

The Financial Reporting Council (FRC) has imposed sanctions on KPMG LLP and audit engagement partner Nick Plumb following an investigation into their Statutory Audit of Carr’s Group plc’s financial statements for the fiscal year ending 28 August 2021 (FY21). The investigation, which focused on breaches of independence requirements, has resulted in both financial and non-financial sanctions.

The FRC’s Final Settlement Decision Notice (FSDN) reveals that KPMG and Plumb failed to comply with the 2019 Ethical Standard and International Standards on Auditing (ISAs) during their handling of the audit. Specifically, the breach arose because KPMG relied on the work of an external firm, Firm X, which conducted the audit of Carr’s associate, Billington Agriculture (Operations) Limited (CBAO). Firm X’s audit partner had been in place for longer than the allowed five-year term, and the firm had also provided non-audit services, including tax and accountancy services, to CBAO—both of which breached independence requirements.

The FSDN clarifies that the breaches did not involve dishonesty, intentional misconduct, or recklessness. Both KPMG and Mr. Plumb cooperated fully throughout the investigation, which contributed to reduced penalties. The sanctions, which include financial penalties and non-financial measures, were imposed as a result of the breach of independence.

For KPMG, a financial sanction of £690,625 was imposed, reduced from the original £1.25 million, due to early disposal, admissions, and exceptional cooperation. Additionally, the firm received a severe reprimand, and a declaration was made that the audit report signed by KPMG did not meet the required independence standards. Furthermore, KPMG is required to review a representative sample of audits involving component auditors outside its network and report back to the FRC on its compliance with independence requirements.

For Nick Plumb, a financial sanction of £38,675 was imposed, down from £70,000, also due to admissions, early disposal, and cooperation during the investigation. Like KPMG, Mr. Plumb received a severe reprimand and a declaration that the audit report he signed did not meet the required independence standards. In addition, KPMG has agreed to cover the costs of the investigation.

The investigation found that Carr’s, a company listed on the London Stock Exchange and classified as a Public Interest Entity (PIE), had relied on Firm X for the audit of CBAO, a subsidiary. However, the breach occurred because KPMG and Mr. Plumb should not have relied on Firm X’s work under the prevailing independence rules.

In a statement, Jamie Symington, FRC Deputy Executive Counsel, emphasized the importance of maintaining independence in audit engagements. “A fundamental objective of any audit engagement is that the intended users trust and have confidence that the audit opinion is professionally sound and objective. When seeking to rely on the work of a component auditor, the group audit firm must ensure that independence is not compromised,” Symington said.

Although the quality of audit work by both KPMG and Firm X was not in question, the FRC highlighted that the breaches were serious and fundamental. The investigation revealed that KPMG and Mr. Plumb failed to take several critical steps to confirm the facts surrounding the breaches, particularly the failure to identify basic prohibitions that are meant to preserve auditor independence.

The FRC’s ruling serves as a stern reminder to the audit profession about the critical importance of upholding the independence standards, particularly when relying on the work of external auditors. The case underscores the need for thorough compliance with independence requirements to maintain the integrity and public trust in the audit process.

GRC Report is your premier destination for the latest in governance, risk, and compliance news. As your reliable source for comprehensive coverage, we ensure you stay informed and ready to navigate the dynamic landscape of GRC. Beyond being a news source, the GRC Report represents a thriving community of professionals who, like you, are dedicated to GRC excellence. Explore our insightful articles and breaking news, and actively participate in the conversation to enhance your GRC journey.