KPMG has come under the spotlight again for ethical failures in its audit of the Ted Baker Group, a high end fashion retailer. The audit firm has been fined £3m and was issued with a severe warning by the The Financial Reporting Council (FRC). In addition, senior statutory auditor and audit engagement partner, Michael Barradell was slapped with a £80 000 fine and a terse reprimand.
The firm and Barradell admitted to wrongdoing in respect of audits conducted for Ted Baker and No Ordinary Designer Label Ltd for the financial year ends, 26 January 2013 and 25 January 2014 respectively.
After a two-year investigation by the FRC, it was concluded that KPMG did indeed breach ethical standards and lost its independence in respect of the audits when it provided expert witness services for the Ted Baker Group in a commercial claim court.
As quoted from the article, “The FRC said there was a risk, which occurred, that the audit team would review the work of the expert when auditing Ted Baker’s treatment of the claim in its accounts and this posed an unacceptable self-review threat.”
It was also noted that KPMG’s fees for their expert engagement exceeded their audit fees significantly for the years under review. This was considered to be a “self-interest” threat by the FRC. However, the executive council did not conclude that KPMG or Mr Barradell lacked objectivity or integrity. KPMG indicated that this was a positive outcome of the investigation.
Claudia Mortimore, interim executive counsel at the FRC, was quoted as saying that upholding Ethical standards was critical on the part of auditors. Third party users of financial statements are therefore able to judge that auditors have been objective.
She further noted that user confidence could be undermined when an auditor’s independence is lost. For this reason, the sanctions imposed on KPMG demonstrates the seriousness in which the transgression is viewed.
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