The Executive Counsel of the Financial Reporting Council (FRC) has issued a Final Settlement Decision Notice under the Audit Enforcement Procedure (AEP) and imposed sanctions against KPMG LLP and Stuart Peter James Smith, a former employee of KPMG, in relation to the statutory audit of the financial statements of Luceco Plc for the financial year ended 31 December 2016 (the “FY2016 Audit”).

Smith performed the role of audit engagement partner in respect of the audit on behalf of KPMG.

The following sanctions have been imposed against KPMG:

  • A financial sanction of £1,250,000, discounted for admissions and early disposal to £875,000;
  • A published statement in the form of a severe reprimand;
  • A declaration that the FY2016 Audit report signed on behalf of KPMG did not satisfy the Relevant Requirements; and
  • A requirement for KPMG to analyse the underlying causes of the breaches of Relevant Requirements and 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 following sanctions have been imposed against Mr Smith:

  • A financial sanction of £50,000, discounted for admissions and early disposal to £35,000;
  • A published statement in the form of a severe reprimand; and
  • A declaration that the FY2016 Audit report signed on behalf of KPMG did not satisfy the Relevant Requirements.

KPMG will also pay Executive Counsel’s costs of the investigation.

During FY2016, the Company 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 Smith 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 FY2016 financial statements included multiple material misstatements in relation to these two areas, which had to be restated in FY2017.

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 FY2016 Audit.

KPMG and 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.

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