FRC fines KPMG £710k over N Brown audit failings

The Financial Reporting Council (FRC) has fined KPMG LLP and audit partner Anthony Sykes for serious failings in their audit of online retailer N Brown Group’s 2022 financial statements.

According to the executive counsel to the FRC, both KPMG and Sykes admitted breaches of the International Standards on Auditing (ISAs) relating to the impairment of non-current assets. The errors concerned how the firm assessed whether N Brown’s assets were overstated, including weaknesses in its impairment model, cash flow forecasts and discount rate calculations.

KPMG was fined £1.25m, reduced to £710,937 after discounts for cooperation and early settlement. Sykes received a £90k fine, reduced to £51,187 on the same basis. Both were also severely reprimanded, and the regulator declared that the 2022 audit report did not meet the required standards. KPMG has paid the costs of the investigation.

The breaches related to several aspects of the audit work, including the carrying value of cash-generating units, sensitivity analysis and reconciliation to market capitalisation. At the time, N Brown’s market value was significantly below its net assets, indicating a potential impairment risk that was not properly addressed by the audit team.

Despite the failings, the FRC said the decision notice did not question the truth or fairness of N Brown’s 2022 financial statements. It noted that while audit deficiencies led to the overstatement of “headroom” in impairment testing, the company was not required to record an impairment for that year.

Jamie Symington, deputy executive counsel of the FRC, said: “In this case, there were numerous failings in relation to the audit work on impairment, despite it having been identified as a significant risk. This case demonstrates that the audit of impairment requires a substantial level of diligence, forethought, and careful exercise of judgement.

“Notably, the respondents provided an exceptional level of cooperation not only by undertaking remedial action to prevent recurrence of the breaches but in conducting self reviews in which a number of the breaches of relevant requirements were identified. As a result both time and costs were saved in this investigation.”

Cath Burnet, head of audit at KPMG UK, added: “We accept that an element of our audit work did not meet the professional standard required. We cooperated fully with the FRC’s investigation and remain committed to driving continuous improvements in our audit practice.”