The UK’s Financial Reporting Council (FRC) has fined KPMG UK and senior statutory auditor and audit engagement partner Michael Francis Barradell over misconduct for their work for British clothing retailer Ted Baker for the financial years ended 26 January 2013 and 25 January 2014.

KPMG were fined £3m ($3.8m) and Barradell was fined £80,000. Both fines were discounted to £2.1m and £46,000 respectively for settlement. Additionally KPMG will pay £112,000 to cover the costs of the FRC’s executive counsel’s investigation costs.

The FRC found that KPMG breached ethical standards as the firm provided expert witness services to Ted Baker in a commercial court claim which led to the loss of KPMG’s independence in respect of its audits.

This created a risk that the audit team would review the work of the witness service it provided when auditing Ted Baker’s treatment of the claim in its accounts. The FRC said this posed ‘an unacceptable self-review threat’.

Additionally, there was a self-interest threat which arose from the fact that the fees for the expert engagement exceeded the audit fees in the relevant years. However, the FRC’s executive counsel did not allege that KPMG or Barradell lacked objectivity or integrity.

FRC interim executive counsel Claudia Mortimore said: “Ethical standards are critical in supporting the confidence that third party users can reasonably have in financial statements in circumstances where, of necessity, they only have incomplete information to judge whether the auditor is in fact objective.

“Where those standards are breached such that the auditor’s independence is lost, user confidence is likely to be undermined; the FRC makes clear by these sanctions the seriousness with which such breaches and their consequences are viewed.”

A spokesperson for KPMG responded: “We are committed to upholding the highest standards of independence and regret that in this instance our processes fell short of the standards that we expect of our firm. We welcome the FRC making clear that they do not allege a lack of integrity or objectivity on KPMG’s part and we note that our audit opinions on Ted Baker’s financial statements have not been called into question.

“We continually seek to review and improve our processes. In 2017 we took the decision not to undertake expert witness work for any company audited by KPMG UK, going beyond the requirements of the FRC’s Ethical Standard. The FRC’s Audit Quality Review team’s most recent public report on KPMG identified the firm’s monitoring and approval of non-audit services as an area of good practice.

“This case is one of a number which have been under investigation by the FRC for some time and which relate to work undertaken several years ago. We have been cooperating fully with our regulator to resolve these older matters and are hopeful that several will be concluded in the near future. Where there are lessons to be learned, we will learn them.”