KPMG handed £1.25m fine over botched Luceco audit

Accountancy giant KPMG has been fined £1.25m in relation to 2016 financial audit of Telford-based LED lighting manufacturer Luceco.

The Financial Reporting Council (FRC) has slapped the fine on KPMG after former employee Stuart Smith admitted eight breaches of “relevant requirements” during the audit. He has also been fined £50,000, discounted for admissions and early disposal to £35,000.

KPMG will also pay Executive Counsel’s costs of the investigation. The £1.25m has been brought down to £875,000 after the firm and individual admitted the breaches.

During 2016, the Luceco was the ultimate parent of a group of companies which produced and distributed lighting products and wiring accessories. The company’s subsidiaries included a production and manufacturing company in China, subsidiaries in a number of other countries, and two distribution companies in the UK.

KPMG and mith admitted eight breaches of relevant requirements in relation 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. The company’s 2016 financial statements included multiple material misstatements in relation to these two areas, which had to be restated in its 2017 results.

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 scepticism.

The breaches were made more serious by the fact that KPMG and Smith were aware of prior year errors in respect of the accuracy of the cost of inventory and therefore this was one of the areas that needed particular focus in the 2016 Aaudit.

A statement from the FRC said: “KPMG and Mr Smith co-operated with the FRC’s investigation and admitted the breaches. The extent and timing of their admissions is reflected in the 30% discount which has been applied to the financial sanctions.”

Last year, Smith and KPM settled with the FRC in relation to its work on the accounts of Carillion and a software company, Regenersis.