EDDC’s recent external auditor facing fourth inquiry; regulator “feeble and timid”

“The accounting watchdog has launched an investigation into KPMG’s audit of Conviviality, the collapsed drinks and off-licence supplier.

It is the latest regulatory scrutiny into the Big Four firm, which is also under investigation over its audits of Carillion, Rolls-Royce and BNY Mellon.

The Financial Reporting Council has accused KPMG of an “unacceptable deterioration” in the quality of its audits and put its audits under special supervision. Last month it fined the firm £3.2 million for misconduct in its audits for Quindell, the insurance technology company. Pressure is increasing on KPMG and its competitors PWC, Deloitte and EY. Carillion and BHS shone a spotlight on the firms’ roles as both auditors and consultants to companies.

Conviviality, owner of the Bargain Booze and Wine Rack chains, collapsed into administration in April. It had been valued at more than £500 million in March but fell from grace after admitting that it had made an error in its forecasting and had found a £30 million tax bill due by the end of the month. It had 4,000 employees and 760 stores. Almost 2,000 jobs were saved when C&C acquired the wholesale business from the administrator. Bestway bought the retail business. The FRC is looking at financial statements for Conviviality in the year to the end of April 2017.

A spokesman for KPMG said: “We believe we conducted our audit appropriately. As reported by the company, it experienced margin weakness at the start of 2018 and also a significant payment to HMRC which had not been included within its short-term cash-flow projections, creating a short-term funding requirement.”

The FRC said that it would also investigate a member of the Institute of Chartered Accountants in England and Wales over the preparation and approval of Conviviality’s financial statements but did not name the individual.

This investigation comes as the FRC, the ICAEW, and the industry-backed Audit Quality Forum prepare to launch a government-backed review that will consider the effectiveness of the existing model for auditing. They are looking for an independent business leader to lead the review.

Bill Michael, who took over as head of KPMG UK in September, supports a review. “The profession needs to be re-evaluated, otherwise we run the risk of eroding trust,” he told The Times . “We can’t have a profession that isn’t trusted. It has consequences for society and the capital markets. You only need one bad apple to lose trust in the system.”

KPMG UK employs 15,000 partners and staff, 3,600 of whom work in its audit practice. Its tax consulting, deal advisory, management and risk consulting practices have grown in recent years and now employ about 7,500 staff.

The FRC is the subject of a parliament-led review which is expected to overhaul how the FRC works and shake up the accountancy profession. MPs looking at Carillion’s collapse accused regulators of being “feeble and timid”.”

Source: Times (pay wall)

“KPMG singled out in critical report on audit industry”

KPMG were, until recently, the auditors of East Devon District Council. Let’s hope that Grant Thornton (now back in the frame at EDDC) perform better – but who recalls their pitiful performance when they “investigated” the disgraced Councillor Graham Brown affair and found ….. nothing.

“KPMG, the accounting firm that signed off the books in the years leading up to Carillion’s collapse, has been singled out by the industry regulator in a report that says the overall quality of the audit profession is in decline.

The Financial Reporting Council, the watchdog for the UK’s accountants, said the profession had demonstrated a “failure to challenge management and show appropriate scepticism across their audits”.

There have been calls for the “big four” accountants – KPMG, PricewaterhouseCoopers, EY and Deloitte – to be broken up to spur competition and improve standards.

All four gave Carillion financial advice before the construction and outsourcing company failed. MPs accused the four of “feasting” on Carillion, whose finances proved far less healthy than directors had suggested.

The FRC reported a decline in the quality of the work of all four, with KPMG performing the worst. The watchdog is already investigating KPMG over its role in the collapse of Carillion and it said on Monday there had been an “unacceptable deterioration” in the quality of its work.

The FRC cited figures that showed half of KPMG’s audits of firms in the FTSE350 index had required “more than just limited” improvements, up from 35% in the previous year.

“The overall quality of the audits inspected in the year, and indeed the decline in quality over the past five years, is unacceptable and reflects badly on the action taken by the previous leadership, not just on the performance of frontline teams,” the regulator said.

“Our key concern is the extent of challenge of management and exercise of professional scepticism by audit teams, both being critical attributes of an effective audit, and more generally the inconsistent execution of audits within the firm.”

It added: “[KPMG] agrees that its efforts in recent years have not been sufficient; the FRC will hold KPMG’s new leadership to account for the success of their work to improve audit quality.” …

The FRC said it would now scrutinise KPMG more closely as a result of its findings. It will inspect 25% more KPMG audits than before and monitor the firm’s plans to improve the quality of its work.

In the FRC’s overall assessment of eight accountants, it found that 72% of audits of all firms, including those outside the FTSE350, required no more than limited improvement, down from 78% last year. While only half of KPMG’s FTSE350 audits were deemed satisfactory, rivals scored far higher, although all showed declines and fell short of the FRC’s target of 90%.

Deloitte scored 79%, down from 82% last year, EY fell from 92% to 82% and PwC was down from 90% to 84%. The four firms immediately below the big four – BDO, Mazars, GT and Moore Stephens – were told that the quality of their audits had generally improved.”

https://www.theguardian.com/business/2018/jun/18/kpmg-singled-out-in-critical-report-on-audit-industry

Auditers: can they understand mathematics let alone accounting?

KPMG audited EDDC accounts until recently.

“Accounting watchdog fined KPMG 3.2 million pounds on Monday for failings in its audit of Quindell Plc, after the legal services firm twice restated its accounts leading to heavy losses. …

The fine in Britain comes as the global network of accounting firms that make up KPMG is under pressure. It is facing an inquiry in Britain over its audit of failed outsourcer Carillion and scrutiny of its South African arm’s work for a company owned by the Gupta family.

The ‘big four’ accounting firms, including KPMG, are facing calls to break up into smaller parts from lawmakers in Britain who allege their dominance of the market means they do not sufficiently challenge clients’ claims about their accounts.

THe FRC is also investigating KPMG’s auditing of the collapsed construction and outsourcing firm Carillion.

Once close to being one of Britain’s blue chip financial firms, the AIM-listed Quindell saw its market value collapse in 2015 after regulators launched probes into its financial accounts.

Quindell, which has since been rebranded as Watchstone, is still being probed by Britain’s Serious Fraud Office and the FRC over its business and accounting practises.

KPMG’s fine was discounted from an original 4.5 million pounds and Smith’s from 120,000 pounds because they chose to settle the case, the FRC said.”

http://flip.it/K0.u3P
Source: Reuters

“Two Dorset councils take out [allegedly] ‘fraudulent’ high-risk loans worth over £120m”

“Campaign group Debt Resistance UK revealed that Dorset County Council and Weymouth and Portland Borough Council have taken out £123m of Lender Option Borrower Option loans (LOBOs) in an effort to reduce their debts.
Dorset County Council took out £95.9m, while Weymouth and Portland Borough Council took £27m at the end of the 2015-16 financial year.
The LOBOs, which were uncovered on Channel 4’s Dispatches documentary series, allow private banks to propose or impose a new fixed rate on a pre-determined future start date.

This means that the borrowing party can either accept the new interest rate or repay the entire loan, paying a ‘breakage penalty’—the fee a client must pay its lender to break from the contract— incurring further costs on the local authority.

Last month the Chartered Institute of Public Finance and Accountancy (CIPFA) urged local councils to review their LOBO loans after auditing firms expressed concern at their impact on local authorities’ accounts. Channel 4’s Dispatches found that over 200 authorities had used the loans, totalling up to £15bn.

Cllr John Whitworth, chair of the Newham Council Scrutiny Committee, labelled the LOBO loans a “fraud on the people,” arguing that many local authorities took out the loans when they were struggling financially during the economic downturn in 2008. He added that the loans became “a very serious handicap” on councils dealing with austerity in later years.

Debt Resistance UK campaigner Joel Benjamin noted: “it is always cheaper for government to borrow than banks, and that PFI and by extension LOBO loans are therefore a fraud.”

Last week a merger between all nine Dorset councils was approved, creating the formation of Christchurch and Poole Council and Dorset Council. The deal is expected to deliver £6m in savings.”

http://www.publicsectorexecutive.com/Public-Sector-News/two-dorset-councils-take-out-fraudulent-high-risk-loans-worth-over-120m

Councils’ end-of-year accounts – the effects of austerity on the accounting function

[The bold highlighted sections are those of Owl]:

“Under the Accounts and Audit Regulations 2015, English local authorities are expected to have their 2017–18 statement of accounts prepared, audited and published by 31 July, a reduction of two months (33%) on previous years.

Changes are obviously being implemented in different ways at different authorities, but some common themes and early learning is starting to emerge.

These can be summed up under four separate headings: Leadership, process, capacity and co-operation, and external audit.

Leadership

If year-end closedown is not seen as a priority by senior management, either the deadlines will not be achieved or the quality of the end-product will suffer. The statement of accounts should be seen as a corporate priority, because it explains how the authority has spent taxpayers money.

Successful section 151 officers “walk the talk” by:

Allowing key staff to focus on closure and not distracting them with other tasks in this important period.

Leading, not just attending, meetings to plan closedown work and monitor progress made to date.

Providing strategic direction on complex and potentially contentious accounting issues.

Fostering good working relationships with the external auditors at director/audit manager level — this pays dividends when unexpected problems crop up late in the day.

Process

First of all, start early. Prior year comparatives, accounting policies, and around half of all disclosure notes can all be drafted and audited well in advance of the year end. Secondly, avoid unnecessary effort by taking the following steps:

Keep journal postings up to date, clear suspense accounts regularly and reconcile bank accounts and feeder systems monthly.

Use estimation techniques to simplify accruals, provisions, overhead re-allocations and similar calculations.

Apply materiality levels and de-minimis thresholds intelligently to avoid unnecessary work and to “de-clutter” core statements and disclosure notes.
Capacity

Following eight years of austerity many back-office services in local government are running at not much more than minimum staffing levels and have insufficient headroom to deal with the additional workload year-end closure represents.

Take a pragmatic approach to staffing needs and recruit accordingly.

Increasingly, local authorities are buying-in short-term capacity to provide specialist skills or improve team resilience.

An alternative approach is using existing resources more flexibly. Some year-end tasks are complex, but many disclosure notes can be prepared by anyone with basic numeracy and spreadsheet skills.

Managing a cast of thousands does take time initially but this reduces as they gain confidence, and most employees will welcome the opportunity to try something new.

All finance staff, including budget holders and treasury management teams, should expect to be involved in closedown.

Co-operation with external audit

Spare a thought for the auditors. Practitioners, in most cases, will only have one set of accounts to worry about, whereas an external audit team might have five or six.

Inevitably, clients who provide good quality raw material and respond quickly to audit queries are expecting to receive earlier certificates and opinions. Auditors also seem to be trying to save time by looking to clients to provide audit evidence and accounting views that they might previously have obtained for themselves, or referred back to specialist technical teams.

Working pro-actively with the local audit team to resolve outstanding issues and avoid unnecessary delays, will be key to meeting the new deadlines this year so I suggest the following:

Operate a no surprises policy: Hold early meetings to discuss complex or contentious issues and any proposed changes to the accounts, working papers or key personnel.

Document the basis of any judgements exercised and assumptions made when preparing the accounts, and the rationale for any changes in accounting policies.

Be prepared to draft, at short notice, briefing notes on any technical issues arising. This forces you to understand the technicalities and provides the auditor with a much clearer answer to the question being raised.

Provide a range of calculations for estimated accruals and provisions so that auditors can confirm these represent the average, or most likely outcome.

Evidence all quality assurance and review processes undertaken at pre-audit stage so that auditors can rely on this work to reduce their own levels of testing.

Prepare comprehensive working papers that provide a clear audit trail and demonstrate that key code requirements have been met.

And finally, don’t forget to manage the on-site audit process. Nominate a key contact point who will take on responsibility for ensuring that audit queries and requests for further information are dealt with promptly (and comprehensively) and that changes to the accounts are processed as agreed.

Peter Worth
director at Worth Technical Accounting Solutions.”