FRC reprimands KPMG over auditing shortcomings

KPMG has been reprimanded by the Financial Reporting Council (FRC) for shortcomings in its auditing of the distributable reserves of a venture capital company, Foresight 4 VCT, with the regulator imposing non-financial sanctions on the firm

The move follows an investigation under the FRC’s audit enforcement procedure, in relation to the statutory audits of the financial statements of Foresight 4 VCT for the 2012/2013, 2013/2014 and 2014/2015 financial years.

As well as a reprimand, the regulator has made an order that KPMG monitor compliance with revised audit procedures on company capital and distributions, and report on this to the FRC.

KPMG admitted shortcomings in its audits of figures relating to the company’s distributable reserves.  These failings may have led to misstatements relating to distributable reserves in the company’s financial statements, which were later restated in 2016 and 2018.

In its final decision notice, the FRC said there was no evidence that the audit team performed any testing on the amount of distributable and non-distributable reserves in the FY2013, FY2014 or FY2015 audits.

The investigation also found that the audit team did not appear to have checked documents at Companies House which would have alerted them to the cancellation of share premium account and the capital redemption reserve, despite having prepared an audit strategy memorandum stating this would be part of the approach.

The FRC said its decision to impose non-financial sanctions reflected the fact KPMG has taken steps to improve its audit procedures on distributions, while the breaches of relevant requirements were not judged to be ‘intentional, dishonest, deliberate or reckless’.

In addition, there was no suggestion that there were insufficient distributable reserves to cover distributions made by the company, and the misstated figures for the company’s reserves did not affect its profits or net asset value.

A KPMG UK spokesperson said: ’We regret that aspects of our audits of this company for the 2013, 2014 and 2015 financial years did not meet the required standards.

‘As the FRC makes clear, the company’s profits and net asset value were not misstated in any of these years and there were no unlawful distributions made by the company in any of these years. 

‘Audit quality is of paramount importance to our firm and we have already updated our audit processes and procedures to address the area of the audit where our work did not meet the required standard.’

At the end of last year, following a formal tender process, Foresight 4 VCT announced Deloitte had been chosen to replace KPMG as its auditor.

In April 2019, the FRC announced its intention to carry out an assessment of the governance, controls and culture within KPMG’s audit practice, in the wake of its ongoing investigation of the firm’s auditing of collapsed auditor Carillion and the ‘unacceptable’ deterioration in quality highlighted in its annual quality review.

FRC Final Decision Notice

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