It’s been a busy old week for KPMG. On top of the industrial tribunal into the hearing that five staff misled the FRC in its inspections of audits of Regenersis and Carillion, it has now been fined just over £3m for the audit work it did for Conviviality.
Conviviality was listed on the Alternative Investment Market of the London Stock Exchange (“AIM”) in July 2013, and between 2013 and 2017 grew rapidly through a series of acquisitions. In FY17 the Company reported significant increases in the key financial reporting areas of revenue, profit and net assets.
In early March 2018, Conviviality issued a series of trading updates which resulted in the Company’s shares being suspended from trading on AIM. An attempt to raise further equity in March 2018 was unsuccessful and Conviviality entered into Administration on 5 April 2018.
FY17 was the second year in which KPMG had audited Conviviality.
The failings admitted by the Respondents in relation to the 2017 Audit relate to a number of areas:
1. A failure to revise, in light of information obtained during the 2017 Audit, their initial assessment of the risks of material misstatement to the financial statements, to design and perform audit procedures responsive to the risks of material misstatement due to fraud, and adequately to document their audit procedures in respect of the risk assessment and fraud risk assessment.
2. A failure to obtain sufficient appropriate audit evidence:
– in relation to the recognition by Conviviality of £5.9m as accrued franchise licence revenue in FY17;
– in relation to the accounting treatment adopted in respect of a third-party contract for the supply of wine;
– in relation to the capitalisation of certain costs and the classification of certain items as exceptional, in accordance with the Company’s accounting policy;
– in relation to several items of accrued supplier income; and
– in order to gain reasonable assurance that the carrying value of the goodwill of each cash-generating unit in the Conviviality group had not been impaired.
3. A failure to apply sufficient professional scepticism in relation to the recognition of accrued franchise licence revenue, the accounting treatment adopted in relation to the third-party wine supply contract, and in the course of performing their audit procedures in relation to goodwill impairment.
4. A failure adequately to document their audit procedures in a number of these areas.
The admitted failings in the 2018 Audit concern failures to document the decision to prepare a Financial Position and Prospects Procedures report to Conviviality (non-audit services) during the period of the FY2018 Audit, which breached the FRC’s Revised Ethical Standard 2016.
In its ruling the FRC said the breaches of Relevant Requirements were not intentional, dishonest, deliberate or reckless and it is acknowledged that the Respondents provided a good level of cooperation during the investigation.
The Financial Reporting Council issued a £3,010,000 fine and a severe reprimand to KPMG over the audit of Conviviality in 2017 and 2018. It also fined audit engagement partner Nicola Quayle £80,850 and issued her with a severe reprimand.
