On April 13, the FRC announced it imposed a “severe reprimand” and a 30 percent reduced financial sanction of 875,000 pounds (U.S. $1.1 million) against KPMG. The FRC said KPMG received the reduced sanction—which should have been £1.25 million (U.S. $1.57 million)—for “admissions and early disposal.”
The FRC further declared that the FY2016 audit report signed on behalf of KPMG did not satisfy relevant requirements. In its final settlement decision notice, the FRC required KPMG to analyze the underlying causes of the breaches of the relevant requirements and determine “whether the firm’s current processes would lead to a different outcome, to identify and implement any further remedial measures necessary to prevent a recurrence, and to report to the FRC at each stage of the process.”
The FRC also imposed sanctions against Stuart Peter James Smith, who performed the role of audit engagement partner in relation to the audit on behalf of KPMG, “although he was a director,” the FRC said. Smith received a “severe reprimand” and a reduced 30 percent financial sanction of £35,000—discounted from £50,000—for “admissions and early disposal.”
KPMG and Smith admitted eight breaches of relevant requirements relating to two areas of the audit: intercompany transactions and year-end intercompany balances; and accuracy of the cost of inventory and year-end inventory balances. Luceco’s FY2016 financial statements, which “included multiple material misstatements in relation to these two areas,” had to be restated in FY2017, the FRC said.
“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 by the respondents to apply professional skepticism,” the FRC said.
According to the FRC, the breaches were serious because KPMG and Smith “were aware of prior year errors in respect of the accuracy of the cost of inventory,” and, thus, this was an area that “needed particular focus in the FY2016 audit.” 
Jaclyn Jaeger is a contributing editor at Compliance Chief 360° and a freelance business writer based in Manchester, New Hampshire.