The Financial Reporting Council (FRC), the UK’s audit watchdog, has announced a significant fine against KPMG UK and one of its audit partners, Nick Plumb, for “basic and fundamental” breaches of independent audit rules.

The sanctions, totalling £690,000 ($930,000) for KPMG and £39,000 ($53,000) for Plumb after discounts for co-operation, relate to the audit of agricultural manufacturer Carr’s Group for the financial year ending August 28, 2021.

The FRC’s investigation found that KPMG’s failings stemmed from its over-reliance on the work of another, unnamed audit firm (referred to by the FRC as Firm X) that had audited one of Carr’s associate companies. The FRC stated that KPMG and Plumb should not have signed off on the Carr’s Group audit report while relying on the work of a firm that was not in compliance with ethical standards.

Specifically, the regulator highlighted that an audit engagement partner at Firm X had exceeded the maximum five-year tenure for the role, a clear violation of the FRC’s 2019 Ethical Standard and International Standards on Auditing.

Jamie Symington, the FRC’s Deputy Executive Counsel, described KPMG’s failings in this instance as being “of a basic and fundamental nature.” While the FRC clarified that the quality of the substantive audit work carried out by both KPMG and Firm X was not called into question, the breaches were deemed serious, even if not “intentional”, “dishonest”, or “reckless.”

In 2023, KPMG was fined a record £21m ($28m) over its “textbook” failures in the collapse of government contractor Carillion. Last year, the FRC said that KMPG had made “notable improvements in priority areas” including audit quality, culture, methodology and resourcing.

KPMG’s response

KPMG UK has accepted the FRC’s findings. Catherine Burnet, head of audit at KPMG UK, stated: “We accept that we did not meet the required standards in this instance. We cooperated fully with the FRC’s investigation, undertook remedial measures to address the findings, and are committed to driving continuous improvements in our audit practice.”

Both KPMG and Plumb were credited by the FRC for their “exceptional level of cooperation” with the investigation, including self-reporting the breaches and volunteering additional relevant information. This cooperation led to a significant reduction in their financial penalties; KPMG’s initial sanction of £1.25m ($1.7m) was discounted to £690,000 ($930,000) and Plumb’s £70,000 ($94,000) penalty was reduced to £39,000 ($53,000).