Watchdog investigates KPMG’s audit of Conviviality

UK accountancy watchdog The Financial Reporting Council has launched an investigation into KPMG’s audit of former drinks wholesaler Conviviality after the latter’s collapse and division in April this year.

The FRC will be reviewing Conviviality’s financial statements for the 52 weeks to 30 April 2017 and investigating KPMG’s handling of their preparation and approval.

Last month in its latest audit quality review, the watchdog had reported “an unacceptable deterioration” in the quality of KPMG’s audits, with 50% of the firm’s FTSE 350 audits requiring more than just limited improvements, compared to 35% in the previous year.

Conviviality, the former owner of companies including Matthew Clark, Bibendum, Bargain Booze and Wine Rack, went into administration on 5 April after filing its intention to do so, should the situation remain unchanged, on 29 March. Since then its wholesale business was bought by the makers of Magner’s Cider, C&G Group, while its retail division was taken on by UK grocery retailer and wholesaler Bestway.

A KPMG spokesperson said: “We believe we conducted our audit appropriately and will co-operate fully with the investigation.

“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. Our audit of the company’s financial statements for the year ended 30 April 2018 had not yet commenced at the point which administrators were appointed”.

In June, the FRC accused KPMG of “misconduct” in its handling of the audit of insurance software firm Quindell, fining the firm £3.2 million. It is also investigating the firm’s auditing of the failed construction company Carillion which went into liquidation in January of this year.

Conviviality’s troubles began when it reported its first profit warning on 8 March in which it declared that a “material error” in its financial forecasts had meant that its profit would be £5.2 million less than expected, with share prices plummeting by as much as 68% following the announcement.

This was followed by a further update on 14 March in which the company added that it was facing a £30 million tax bill and had suspended trading in its shares. In an effort to pay off debts, on 16 March Conviviality stated that it was “actively engaging with its stakeholders” as it worked out its “funding requirements”.

On 19 March the departure of CEO Diana Hunter was announced. This followed additional restructuring at the company which saw a flurry of directional and operational changes announced in January 2018, as well as the departure of Andrew Humphreys as CFO in October last year and the appointment of the appointment of Mark Moran in his place. In January 2018, the former head of Bibendum and business development director at Conviviality, Michael Saunders, announced that he had scaled back his role at the drinks supplier to pursue other projects. In May, new owners the C&C Group announced Saunders was to rejoin Bibendum as its chief executive.

Conviviality tried and failed to raise the £125m needed to pay off debts and continue trading, with the company filing its intention to appoint administrators on 29 March.

On 4 April British and Irish drinks producer and distributor C&C Group and brewing giant AB InBev announced a joint plan to acquire Matthew Clark, Bibendum and other subsidiaries from the ailing wholesaler.

Later, on 9 April, Conviviality confirmed the sale of its retail businesses, including Bargain Booze and Wine Rack, to Bestway for £7.25 million.

The following month, the C&C Group stated that it had agreed a repayment schedule with both HMRC and three banks which lent money to Conviviality, with the money owed totalling c. £138 million.

According to a report in The Times, investors in Conviviality are considering legal action against the drinks company’s board after claims that they were misled over the health of the wholesaler’s finances. A particular bone of contention is Conviviality’s decision to raise £30m to fund its acquisition of 127 Central Convenience stores last year.

To date, the veracity of this report has not been confirmed.