KPMG fined £1.25m over Luceco audit

The Financial Reporting Council (FRC) has sanctioned KPMG and a former employee of the firm, Stuart Smith, over the audit of Luceco’s financial statements for the year ended 31 December 2016.

The Big Four firm was handed a fine of £1.25m, discounted for admissions and early disposal to £875,000, as well as a published statement in the form of a severe reprimand.

The FRC said a declaration has also been made that the FY16 audit report signed on behalf of the firm “did not satisfy the relevant requirements”.

KPMG is now required to analyse the causes of these breaches and whether its current processes would lead to a different outcome, to help “identify and implement any further remedial measures necessary to prevent a recurrence”.

Smith had acted as audit engagement partner on behalf of KPMG, although he was a director. He was fined £50,000, discounted for admissions and early disposal to £35,000, and also given a severe reprimand. 

The FRC said KPMG and Smith admitted eight breaches of relevant requirements in relation to two areas of Luceco’s audit: intercompany transactions and year end intercompany balances; and accuracy of the cost of inventory and year end inventory balances. 

The company’s FY16 financial statements included “multiple material misstatements” in relation to these two areas, according to the FRC, which had to be restated in FY17.

The breaches included failures in the design and performance of audit procedures, failures to adequately review and critically assess the audit evidence obtained, failure to document the audit work and failures to apply professional scepticism.

The FRC noted that the breaches were “made more serious” by the fact that KPMG and Smith were aware of prior year errors regarding the accuracy of the cost of inventory, and “therefore this was one of the areas that needed particular focus in the FY16 audit”.

Cath Burnet, head of audit, KPMG UK, said: “We are committed to dealing with, and learning from, our historical cases and regret that aspects of our 2016 audit of Luceco plc fell short of required standards.

“We continue to invest significantly in training, controls and technology to improve quality and resilience in our audit practice.”