The UK’s financial watchdog has taken strong action against one of the world’s biggest accounting firms over serious mistakes in auditing a major retailer. The Financial Reporting Council (FRC) has imposed sanctions on KPMG and its lead audit partner, Anthony Sykes, for failing to properly check important financial figures in the accounts of N Brown Group.
The case centers on the retailer’s financial statements for the year ending 26 February 2022. Both KPMG and Sykes admitted to mistakes in how they reviewed the company’s assets. These errors are part of what auditors call “impairment testing”, which is a way to make sure a company’s property, equipment, and other long-term assets are not valued too high on its balance sheet.
Serious Breaches in the Audit Process
The FRC’s investigation, led by Jamie Symington, deputy executive counsel, revealed that the audit work was seriously flawed. Auditors are expected to carefully examine a company’s assets, cash flow projections, and business plans to ensure they reflect reality. In this case, the review was incomplete and inaccurate.
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Specifically, the investigation found that KPMG and Sykes failed to properly check the value of N Brown’s cash-generating units, which are the parts of a business that bring in money. The cash flow forecasts used in the audit were not reliable. The method for calculating asset values, including how future money was discounted to today’s value, was flawed. Sensitivity analysis, which shows how changes in assumptions affect results, was missing or incomplete. Finally, the audit did not consider that the company’s market value was much lower than the total assets on its books—a key warning sign of potential overvaluation.
The FRC said these failings were especially serious because the risk of assets being overstated had already been identified. This means the auditors should have exercised extra care, but they did not.
Penalties and Official Reprimands
As a result of the investigation, KPMG and Anthony Sykes have faced financial penalties. KPMG must pay £710,937.50 ($955,550), and Sykes has been fined £51,187.50 ($68,799). These amounts were reduced due to early cooperation and admission of the breaches.
In addition to the fines, both KPMG and Sykes received severe reprimands. The FRC also officially declared that the audit report for N Brown’s 2022 financial year did not meet the required standards. This is a serious mark against the auditor, as it highlights the failure to provide trustworthy assurance about the company’s finances.
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N Brown, a well-known UK retailer specializing in clothing and footwear, was listed on the Alternative Investment Market (AIM) at the time. Investors rely on accurate financial statements to make decisions, and errors like these can mislead the market. The FRC emphasized that auditing asset values requires careful judgment, thorough checking, and thoughtful planning.
Importance of the Case
The FRC noted that this case is a clear example of what can go wrong when auditors do not fully check a company’s financial situation. Impairment testing is a key part of an audit because it ensures that a company’s assets are not overstated. When auditors fail in this area, the financial reports can give a misleading picture of the company’s health.
The investigation also serves as a reminder that financial watchdogs actively monitor auditors to maintain trust in the financial system. While the mistakes were admitted, the sanctions show that even top-tier firms like KPMG and experienced auditors like Anthony Sykes can face serious consequences for lapses in professional judgment.
KPMG has recently been expanding into auditing new technologies, including AI tools, highlighting its focus on innovation in financial services. However, this case underscores the importance of maintaining high standards in traditional auditing work.