Paul Brehony discusses the recent FRC fine imposed on a former KPMG audit partner, in Thomson Reuters Regulatory Intelligence

Last month, the Financial Reporting Council (FRC) announced swingeing fines against KPMG and its former partner Anthony Sykes for “numerous failings” in overseeing the audit of N Brown Group plc (N Brown), then one of the UK’s largest online clothing and footwear retailers. In relation to the audit for the 2021-22 financial year (FY22), Sykes admitted to “serious breaches” of the International Standards on Auditing (ISAs).

The story, though noteworthy of itself, hit the headlines because it was the third time in less than four years that Sykes had been fined by the regulator for comparable breaches in his audit supervisory work.

Initially, the FRC levied a fine of GBP 90,000 on Sykes and GBP 1.25 million on KPMG for these audit failures, but both penalties were reduced to reflect their “exceptional level of cooperation”, admission of wrongdoing, and in KPMG’s case, undertaking remedial action to prevent recurrence of the breaches.

On the two previous occasions, Sykes had been fined a combined total of more than GBP 156,000 by the FRC for separate KPMG audit breaches that he had supervised. These were in relation to “serious failures” in the audit of jet engine maker Rolls-Royce, and for a “succession of failings” in his audit work relating to TheWorks.co.uk, a discount retailer.

For these serious audit failures, KPMG also received financial sanctions of GBP 3.375 million (adjusted down from GBP 4.5 million for admissions and early disposal) in relation to Rolls-Royce and GBP 1.024 million (reduced from GBP 1.75 million) for audit failings on TheWorks.co.uk

After a 38-year career at the Big Four auditor, Sykes finally retired in September 2022 – to the likely relief of KPMG’s PII insurers!

While Syke’s unfortunate litany of audit errors has inevitably attracted media attention, they are emblematic of a much wider systemic problem that has plagued KPMG. Arguably, these collective failures are of far greater concern than the periodic individual failings of one man.

In examining the aggregate value of sanctions that have been levied by the FRC over the past five years in response to audit failings, KPMG has the worst track record, by far, of the Big Four accountants during that time period.

Indeed, since 2020, KPMG has been fined more than its three major competitors put together: GBP 81.8 million in pre-discount fines from a combined pre-discount total of GBP 154 million across the Big Four. [Source: FRC, CityAM. Consultancy.uk analysis] https://www.consultancy.uk/news/40601/big-four-fined-more-than-100-million-by-frc-over-five. By contrast, the total fines issued to PwC, Deloitte and EY were GBP 34.7m, GBP 19.6m, and GBP 18.2m, respectively.

In addition to a fine of just under GBP 711,000, the FRC delivered a severe reprimand to KPMG for its audit failings in relation to N Brown. This is the 14th financial sanction made by the regulator against the firm over the past five years, from a total of 30 sanctions imposed by the FRC across all the Big Four firms.

Most notably, KPMG was hit with a record GBP 21m fine by Britain’s accounting watchdog in October 2023 for its auditing work on the failed government contractor, Carillion. The FRC said its investigation found that KPMG had failed to adhere to “the most basic and fundamental audit concepts”, as it discovered an “unusually large number of breaches”. The FRC originally intended to impose a GBP 30 million fine, but the figure was reduced to reflect KPMG’s cooperation and admissions of wrongdoing.

In response to the FRC’s conclusions, Jon Holt, KPMG’s UK chief executive, was unequivocal: “It is clear to me that our audit work on Carillion was very bad, over an extended period,” he said. “In many areas, some of our former partners and employees simply didn’t do their job properly.”

Notwithstanding his mea culpa and the catalogue of sanctions in more than a dozen similar cases of audit failure, KPMG announced in January 2025 that the 450+ UK equity partners of KPMG would benefit from a record payout: they earned an average of GBP 816,000 each. Despite only a 1% rise in revenue in the year to September 2024, the highest ever partner distribution was driven by an 11% rise in pre-tax profits to GBP 404 million, which resulted from cost-cutting measures. https://kpmg.com/uk/en/media/press-releases/2025/01/kpmg-uk-records-good-revenue-in-challenging-market.html

The FRC’s recent reputation has been on an upward trajectory but the conclusions of the N Bown case do raise further questions about whether the FRC has sufficient teeth to be an effective deterrent and to enable it to regulate effectively so as to create a change in both culture and behaviour within audit practices.

Manifestly, the scope and scale of fines frequently levied by the FRC creates a Groundhog Day feel to KPMG’s catalogue of systemic audit failure in particular, albeit they are comprised of different audits across diverse sectors.

In the case of the N Brown audit, the issue proved to be the treatment and audit methodology in the context of impairment.

Although more recent FRC cases have often cited “a lack of professional scepticism” as a common problem, this latest KPMG failing concerned the impairment of non-current assets – which occurs when the actual value of an asset permanently falls below its stated value on a company’s books. Sykes and KPMG admitted serious breaches of the ISAs in their audit work on impairment of non-current assets.

In its statement, the FRC noted: “Impairment testing contributes to an accurate representation of the company’s financial position, helping to ensure that the company’s assets are not overstated. International Accounting Standard 36 (IAS 36) requires companies to assess non-current assets for impairment where there are indications that they may be overstated and auditors are required to determine if these assessments are performed in accordance with the standard.”

The FRC’s technical findings focussed on the pivotal importance of auditors applying sufficient “diligence, forethought and careful exercise of judgment in this complex area of financial reporting.” Gloomily, the FRC concluded that “In this case, there were numerous failings in relation to the audit work on impairment, despite it having been identified as a significant risk.”

But the repeat pathology of the N Brown case once again calls into question the wisdom of the government’s decision to suspend plans to legislate on long overdue audit reform – in particular, the proposed formation of Audit, Reporting and Governance Authority (ARGA) and the roll out of powers with substantially more teeth to act as an effective deterrent  to change the culture and habits of the audit profession.

Having faced multiple delays, the legislative process to establish ARGA is currently pending the introduction of a new bill in Parliament. Without any clear timetable in place, the most recent suspension of ARGA in July raises further questions about the precise direction of UK audit regulation and governance reform. Hopefully, we may have some answers soon.