FRC mulls KPMG investigation over Conviviality auditing

01 May 2018 Authored by Consultancy.uk

KPMG could face investigation by the Financial Reporting Council over its role in the collapse of Conviviality. The firm is already under investigation by the auditing ombudsman, having previously drawn fierce criticism from Members of Parliament for its role as internal auditor of liquidated construction firm Carillion.

The Financial Reporting Council (FRC) is understood to be “looking closely” at KPMG after a litany of accounting bungles led to the collapse of Conviviality in March 2018. KPMG had acted as the alcohol retailer’s auditor since 2015, and according to an FRC spokesperson, "If the relevant threshold tests are met in relation to accountants at the company and/or its auditors a formal investigation may be opened.”

Conviviality, which included the budget off-license chain among its portfolio, entered administration at the beginning of April. Prior to its collapse, Conviviality ran more than 700 retail stores, alongside 352 franchises, employing thousands of people across Britain. Trading primarily as corner shops and off-licenses, Conviviality’s outlets included Bargain Booze, Select Convenience, WS Retail and Wine Rack. A string of profit warnings and the revelation of a massive multi-million tax bill were ultimately what did for the firm – forcing the resignation of Chief Executive Dianna Hunter, while shareholders rapidly lost faith in the company.

FRC mulls KPMG investigation over Conviviality auditing

Both failures related to Conviviality’s auditing, the first coming on March 8th 2018, when profits were found to be 20% less than previously reported. The accounting blunder saw share prices go into free-fall, plummeting from 301p per share to 123p per share in less than a day, and wiping £300 million from the company’s value. Less than a week later, Conviviality was hit by a second accounting discrepancy, when on March 14th it admitted in its financial report to having overlooked a £30 million tax bill.

After the series of unfortunate events, Conviviality was unable to find a buyer, and was forced to appoint administrators at the start of April. Fortunately for the group’s large staff, the sale of the firm was even more rapid than its crash into bankruptcy. In a matter of days, PwC administrators confirmed that a £7.5 million deal with food wholesaler Bestway had been completed, rescuing over 2,000 employees in the group’s retail division. The deal saw the foods wholesaler take control of Bargain Booze, Wine Rack, Select Convenience and WS Retail, following PwC’s sale of Conviviality’s Direct business earlier in the same week, lifting the total number of staff whose jobs had been protected to over 4,000.

If a formal investigation was to be launched into KPMG, the FRC retains the right issue a fine if it finds any evidence of misconduct, or that its practices were of substandard quality. KPMG is already under investigation by the UK’s accounting watchdog, with the FRC also probing the firm’s role in the collapse of construction firm Carillion. The probe is examining whether the organisation’s auditor failed to adhere ethical and technical industry criteria. On the back of this, MPs investigating the collapse of the outsourcer recently called on the UK government to break up the hold that the Big Four of KPMG, PwC, EY and Deloitte have on the UK's company audit market – something the additional controversy of Conviviality’s auditing woes is likely to add momentum to. The Big Four’s share of FTSE 350 auditing has increased from 95% to 98% over the past five years.

Related: Clamour for Big Four competition probe as Grant Thornton pulls FTSE 350 audit bids.

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