The Financial Reporting Council (FRC), the UK’s accounting regulator, said on Thursday it fined PwC and KPMG for “serious” failings in their auditing of Eddie Stobart Logistics (ESL) in 2017 and 2018.
The FRC said KPMG performed the 2017 audit on ESL and resigned as auditor in 2018 “because of a breakdown in their relationship with ESL’s management, following difficulties in obtaining sufficient appropriate audit evidence.” PwC was appointed for the 2018 audit.
PwC was fined £1.99 million, reduced from £3.5 million, due to exceptional cooperation and admissions, the FRC said in a statement.
PwC admitted failings related to property transactions entered into by ESL, audit procedures, and property lease accruals, the FRC said.
The regulator also fined PwC audit partner Philip Storer £51,187. He avoided a fine of £90,000 due to exceptional cooperation and admissions.
The FRC said: “There were numerous serious failures in relation to the audit work on ESL’s property transactions, including a failure to identify revenue recognition on those transactions as a significant risk of material misstatement; failing to carry out a formal consultation on the technical aspects of accounting for these transactions; a lack of challenge of management’s selection of accounting policy; and a lack of professional judgement in their work on the transactions.
“Furthermore, the disclosures in the financial statements failed to adequately explain the impact of the property transactions on ESL’s financial performance.
“PwC and Mr Storer assisted in the investigation by making comprehensive early admissions (including admissions relating to matters which were not in the communicated scope of the investigation), and this has been recognised in the discount to the financial sanction of 12.5% (in addition to the 35% reduction for early settlement) to reflect exceptional cooperation as a mitigating factor.”
PwC said in a statement.“Our work was not of the required standard on this occasion and for this we apologise.”
The regulator said it fined KPMG £877,500, reduced from £1.35 million due to admissions. “KPMG’s poor disciplinary record was noted as an aggravating factor,” said the FRC.
The FRC also fined KPMG’s former audit partner Nicola Quayle £45,500, cut from £70,000 due to admissions.
The regulator said KPMG’s admitted failings related to the audit work carried out on property transactions entered into by ESL, and the disclosure in the financial statements regarding those transactions.
“These transactions had a significant effect on ESL’s financial performance, and without the profit generated from them, ESL would have been in a loss-making position …”
Cath Burnet, head of audit at KPMG UK, said the firm was committed to resolving and learning from past cases.
Burnet said: “This development marks another step forward in dealing with these matters, and we continue to invest significantly in audit quality, in our technology and training, to drive further improvements.”