Calls for ‘beefed up’ regulator as ex-KPMG auditor being fined again
An ex-KPMG auditor has been fined for ‘serious breaches’ – the latest in a long line of reprimands aimed at the Big Four. Paul Brehony, a partner at Signature Litigation, argues that the case shows a need for the government to re-examine its decision to suspend audit reform in the UK.
Recent news that Anthony Sykes, a former KPMG partner, has been fined £51,187 by the Financial Reporting Council (FRC) was certainly eye-catching. Sykes admitted to “serious breaches” of the International Standards on Auditing (ISAs) during KPMG’s audit of clothing retailer N Brown Group (N Brown) for the financial year ended February 2022 (FY22). Remarkably, it is the third time in four years that he has been fined by the regulator for comparable breaches.
Previously, Sykes had paid in excess of £156,000 for two separate audits which he supervised, relating to TheWorks.co.uk and Rolls-Royce. After 38 years at KPMG, likely to the relief of their PII insurers, he retired in 2022.
Arguably, it is emblematic of the wider problem facing his former firm: over the past five years, KPMG has the worst track record, by far, of the Big Four in relation to sanctions that have resulted from audit failings. For its audit of N Brown, one of the UK’s largest online clothing and footwear retailers, KPMG received a severe reprimand from the FRC as well as a fine of just under £711,000: the 14th financial sanction against the firm by the regulator since 2020, from a total of 30 sanctions imposed by the FRC on the Big Four firms over the past five years.
Notwithstanding these repeated sanctions, which include a record fine of £21 million for a catalogue of serious audit failures of the collapsed contractor Carillion, the UK equity partners of KPMG had their biggest ever payday in the year to September 2024, earning an average of £816,000 each.
Until recently, the FRC’s reputation had been on a consistent and welcome upward trajectory, but this latest case does raise questions about the deterrent effect of fines and, specifically, the efficacy of the FRC’s existing range of powers and whether these need to be bolstered to engender a change in culture and behaviour within audit practices.
Given the scale and frequency of the fines, there is manifestly a Groundhog Day element to KPMG’s catalogue of systemic audit failure, albeit these failings involved different audits in diverse sectors.
This applies particularly in the context of impairment. Although recent FRC cases have routinely cited "a lack of professional scepticism", this latest KPMG failing concerned the impairment of non-current assets – which occurs when the actual value of an asset permanently falls below its stated value on a company’s books.
According to the FRC, impairment testing contributes to an accurate representation of a company’s financial position, helping to ensure that its assets are not overstated.
In its technical findings, the FRC focussed on the critical importance of auditors applying sufficient "diligence, forethought and careful exercise of judgment in this complex area of financial reporting."
Depressingly, the FRC concluded that “In this case, there were numerous failings in relation to the audit work on impairment, despite it having been identified as a significant risk.”
As has become customary in such breaches, substantial discounts were applied to the regulator’s fines in recognition of exceptional cooperation with the FRC’s investigation by both KPMG and Anthony Sykes.
But the repeat pathology of the N Brown case again calls into question the wisdom of the government’s decision to suspend plans to progress long overdue audit reform – in particular, the proposed formation of Audit, Reporting and Governance Authority (ARGA) and its related "beefed up" powers.
