The Financial Reporting Council (FRC) has handed accountancy firm KPMG a fine of £3m for “serious” audit failings of Conviviality.
As per the FRC investigation, Conviviality listed on the Alternative Investment Market of the London Stock Exchange in July 2013 and between 2013 and 2017 grew rapidly through a series of acquisitions. The FRC stated that in FY17, Conviviality reported “significant increases” in the key financial reporting areas of revenue, profit and net assets.
However, in early March 2018, Conviviality issued a series of trading updates which resulted in the Company’s shares being suspended from trading on AIM. An attempt to raise further equity in March 2018 was unsuccessful and Conviviality entered into Administration on 5 April 2018. Its retail brands – Bargain Booze, Bargain Booze Select Convenience, Wine Rack and WS Retail (Central Convenience) – were bought by Bestway Wholesale later that month.
The investigation by the FRC found that KPMG exhibited:
- A failure to revise, in light of information obtained during the 2017 Audit, their initial assessment of the risks of material misstatement to the financial statements, to design and perform audit procedures responsive to the risks of material misstatement due to fraud, and adequately to document their audit procedures in respect of the risk assessment and fraud risk assessment.
- A failure to obtain sufficient appropriate audit evidence:
a. in relation to the recognition by Conviviality of £5.9m as accrued franchise licence revenue in FY17;
b. in relation to the accounting treatment adopted in respect of a third-party contract for the supply of wine;
c. in relation to the capitalisation of certain costs and the classification of certain items as exceptional, in accordance with the Company’s accounting policy;
d. in relation to several items of accrued supplier income; and
e. in order to gain reasonable assurance that the carrying value of the goodwill of each cash-generating unit in the Conviviality group had not been impaired.
- A failure to apply sufficient professional scepticism in relation to the recognition of accrued franchise licence revenue, the accounting treatment adopted in relation to the third-party wine supply contract, and in the course of performing their audit procedures in relation to goodwill impairment.
- A failure adequately to document their audit procedures in a number of these areas
As well as the £3m fine (originally £4.3m but discounted for admissions and early disposal by 30% to £3,010,000), other sanctions included: a severe reprimand; declaration that the Audit report did not satisfy the audit reporting requirements for the reasons set out in the Final Decision Notice; and a non-financial sanction requiring KPMG to report to the FRC identifying the causes of the deficiencies in the 2017 Audit and the steps and remedial action which the firm has taken to prevent to reoccurrence of those deficiencies.
Deputy executive counsel to the FRC Claudia Mortimore said: “The audit failings in this case were serious, spanned several significant areas of the financial statements and related to a number of fundamental auditing standards including the requirement to obtain sufficient appropriate audit evidence, apply sufficient professional scepticism, and prepare proper audit documentation. The sanctions reflect the seriousness of the failings.
“The sanctions also reflect the poor regulatory track record of each of the Respondents and are intended to enhance the quality and reliability of future audits.”
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