FRC fines KPMG £4.3 million over Conviviality audit

KPMG has been hit with another multi-million-pound fine from the Financial Reporting Council (FRC), over its audits of drinks company Conviviality in 2017.

FRC fines KPMG £4.3 million over Conviviality audit

KPMG's Glasgow office

The FRC announced yesterday that it had issued a final decision notice under Audit Enforcement Procedure and imposed sanctions against KPMG and the audit engagement partner, Nicola Quayle, in relation to the statutory audit of Conviviality for the financial years ended 30 April 2017 and 29 April 2018.

This is the second set of sanctions imposed against KPMG this week. On Tuesday, Stuart Smith, a former auditor at the Big Four firm was fined £150,000 and banned for three years after admitting to misleading the FRC.

Conviviality listed on the Alternative Investment Market of the London Stock Exchange 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.

KPMG admitted that it had failed 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.

The firm also said it had failed to obtain sufficient appropriate audit evidence in relation to the recognition by Conviviality of £5.9m as accrued franchise licence revenue in FY17 and the accounting treatment adopted in respect of a third-party contract for the supply of wine.

Failings were also found in relation to the capitalisation of certain costs and the classification of certain items as exceptional, in accordance with the Company’s accounting policy and several items of accrued supplier income.

Claudia Mortimore, deputy executive counsel to the FRC, said: “The audit failings in this case were serious, spanned several significant areas of the financial statements and related to a number of fundamental auditing standards including the requirement to obtain sufficient appropriate audit evidence, apply sufficient professional scepticism, and prepare proper audit documentation. The sanctions reflect the seriousness of the failings.

“The sanctions also reflect the poor regulatory track record of each of the respondents and are intended to enhance the quality and reliability of future audits.”

Jon Holt, chief executive of KPMG, added: “I’m sorry that our work wasn’t good enough in this instance. I am committed to resolving, and learning from, our past cases and this development marks another step forward in dealing with these matters.”

Share icon
Share this article: