FRC sanctions KPMG and audit partner over M&C Saatchi audit

The Financial Reporting Council (FRC) has issued a Final Settlement Decision Notice (FSDN) and imposed sanctions against KPMG and Adrian Wilcox in respect of their statutory audit of M&C Saatchi plc for the financial year ended 31 December 2018.

The sanctions towards KPMG are a financial sanction of £2.25m, discounted for admissions and early disposal to £1.46m, and non-financial sanctions comprising a published statement in the form of a severe reprimand, and a declaration that the audit report signed on behalf of KPMG did not satisfy the relevant requirements.

Wilcox will have to pay a financial sanction of £75,000, discounted for admissions and early disposal to £48,750, as well as receiving a published statement in the form of a severe reprimand, and a declaration that the audit report signed did not satisfy the relevant requirements.

M&C Saatchi is a global marketing services business and has been listed on the Alternative Investment Market (AIM), a sub-market of the London Stock Exchange, since July 2004. It was, at the relevant time, a public interest entity by virtue of its market capitalisation level.

The FRC investigation was launched following M&C Saatchi’s discovery of accounting errors, announced in 2019, which ultimately led to a restatement of the FY2018 profit in the FY2019 annual accounts. 

The investigation looked at a number of elements of the audit, including revenue recognition, journal entries, and the year-end consolidation process.

KPMG and Wilcox have admitted a failure to audit with sufficient professional scepticism the release of WIP credits (a type of client payment on account), which increased revenue by £1.2m, as well as failures to properly audit journal entries across a number of subsidiary companies, including a lack of any journals-testing at all for two subsidiaries, and a failure to identify potentially high-risk journals for testing across a number of entities.

In addition, they have also admitted a failure to document the auditors’ reasoning, or complete their inquiries with management, in relation to the retention of rebates under a contract which, on its face, appeared to require such rebates to be passed back to a client.

The sanctions imposed have taken into account the fact that it was a challenging audit and the auditors demonstrated some robustness in pushing back the signing date until they obtained further evidence from management. 

However, the breaches of relevant requirements included serious failings and, specifically, breaches relating to UK sub-consolidation adjustments affecting or potentially affecting a significant number of people in the United Kingdom such as the public, investors, or other market users. Taken together, the breaches undermine confidence in statutory audit and the truth and fairness of financial statements.

Claudia Mortimore, deputy executive counsel, said: “KPMG’s audit did not meet the required quality standards in a number of respects amounting to serious audit failings and breaches of audit standards. This included a lack of professional scepticism in certain high-risk areas of the audit and basic failings in journal testing.”