Sanctions against KPMG over Ted Baker audits

The following terms of settlement have been agreed by the FRC’s Executive Counsel and approved by a legal member of the independent Tribunal Panel:

KPMG and Mr Barradell admitted to the Misconduct prior to service of a draft complaint and this is reflected in the settlement discounts applied.

The Misconduct arose from KPMG providing expert witness services to Ted Baker in a Commercial Court claim.

The FRC found this to be in breach of the ethical standards and led to the loss of KPMG’s independence in respect of the Audits.

The watchdog said there was a risk, which occurred, that the audit team would review the work of the expert when auditing Ted Baker’s treatment of the claim in its accounts and this posed an unacceptable self-review threat. In addition, there was a self-interest threat arising from the fact that the fees for the expert engagement significantly exceeded the audit fees in the relevant years, which KPMG and Mr Barradell also failed properly to consider.

However, the Executive Counsel did not allege that KPMG or Mr Barradell in fact lacked objectivity or integrity.

KPMG and Mr Barradell, members of the Institute of Chartered Accountants in England and Wales (ICAEW), admitted that their conduct fell significantly short of the standards reasonably to be expected of a Member and a Member Firm and that they failed to act in accordance with the ICAEW’s Fundamental Principle of Professional Competence and Due Care.

Claudia Mortimore, Interim Executive Counsel at the FRC, said: “Ethical Standards are critical in supporting the confidence that third party users can reasonably have in financial statements in circumstances where, of necessity, they only have incomplete information to judge whether the auditor is in fact objective. Where those standards are breached such that the auditor’s independence is lost, user confidence is likely to be undermined; the FRC makes clear by these sanctions the seriousness with which such breaches and their consequences are viewed.”