FRC fines KPMG £2.1m for ‘breach of ethical standards’ in Ted Baker audit

The Financial Reporting Council (FRC) has issued a £2.1m fine and “severely reprimanded” KPMG and its partner Michael Francis Barradell, after they admitted to “misconduct” in relation to audits of Ted Baker and No Ordinary Designer Label.

Barradell also received a reprimand and a fine of £80,000 which was reduced to £46,800 after “adjustment for mitigating factors and a discount for settlement”. KPMG was asked by Ted Baker to complete an audit of their financial statements for the financial years ended 26 January 2013 and 25 January 2014.

The FRC says misconduct arose from KPMG providing expert witness services to Ted Baker in a commercial court claim, which were in breach of its ethical standards and meant KPMG’s independence was compromised during the audits.

The counsel said that the audit team reviewed the work of an expert when auditing Ted Baker’s treatment of the claim in its accounts and said this posed an unacceptable self-review threat.

In addition, it said there was a “self-interest threat” arising from the fact that the fees for the expert engagement significantly exceeded the audit fees in the relevant years, which it claims KPMG and Barradell “failed to properly to consider”. The executive counsel says it did not allege that KPMG or Barradell lacked objectivity or integrity.

Claudia Mortimore, interim executive counsel at the FRC, 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 KPMG spokesman said: “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.”

The fine is not the first time the Dutch company has been investigated by the FRC with audits of Carillion and Rolls-Royce also coming under investigation in the past two years.