KPMG Fined £21M For Being "Exceptionally Bad"

 

Another day, another fine for a Big Four auditor.

KPMG has been slapped with a record £21 million fine by the Financial Reporting Council (FRC) over its botched auditing of Carillion, the construction company that went spectacularly bust in 2018.

The FRC said that KPMG's audits of Carillion were "exceptionally bad" and that the firm had failed to "discharge its professional duties properly".

The fine is the latest blow to KPMG, which has been under increasing scrutiny in recent years over its auditing practices. The firm has been fined a number of times for audit failings, including a £14.4 million fine last year for misleading the FRC during spot checks on its audit of Carillion.

The Carillion collapse was one of the biggest corporate failures in British history. The company went bust with debts of almost £7 billion, leaving thousands of workers and suppliers out of pocket.

A public inquiry into the collapse found that KPMG's audits of Carillion were "deeply flawed" and that the firm had failed to spot a number of red flags, such as the company's aggressive accounting practices and its over reliance on debt.

The FRC's latest fine is a welcome sign that the regulator is taking a tougher stance on audit failings. However, it is clear that the Big Four auditors still have a long way to go to improve their standards.

This is just the latest in a string of audit failings by the Big Four. It is clear that these firms need to do much more to improve their standards.

Here's what needs to happen:

• The FRC needs to be given more powers to hold auditors to account. This could include the power to impose larger fines and to disqualify individuals from working as auditors.
• The Big Four auditors need to be split up. This would create more competition in the audit market and would make it more difficult for the Big Four auditors to collude.
• There needs to be more transparency in the audit process. This could involve requiring auditors to publish more detailed reports on their audits and to give shareholders a greater say in the appointment of auditors.

Only by taking these steps can we restore confidence in the audit profession and protect investors from audit failings.

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KPMG and PwC Get a Scolding From The FRC

 

Two of the world's largest accounting firms, KPMG and PwC, have been fined by the Financial Reporting Council (FRC) for their audits of Eddie Stobart Logistics.

KPMG was fined £877,500 for its 2017 audit of the lorry company, and also fined one of its former partners, Nicola Quayle, £45,000. PwC was fined £1.9 million for its 2018 audit of Eddie Stobart.

The FRC found that both audits had failed to meet certain requirements, including gathering enough relevant and appropriate evidence regarding the services provided by Eddie Stobart during certain transactions. This prevented them from attributing the revenue generated by those services and recognising it upfront in the financial year.

In a statement, KPMG said it "accepted the findings of the FRC and has taken steps to improve its audit processes". 

PwC said that it "is committed to high quality audits and takes the findings of the FRC seriously." The firm said that it has "implemented a number of actions to address the issues identified" and that it is "confident that our audits meet the highest standards."

The sanctions against KPMG and PwC are the latest in a series of fines and reprimands that have been handed down to the Big Four firms in recent years. In May 2022, KPMG was fined £14.4 million for its audit of Rolls-Royce.

The FRC's actions are a sign that it is taking a tougher stance on audit quality. The regulator has said that it wants to see the Big Four firms "raise their game" and improve the quality of their audits.

The sanctions against KPMG and PwC will also have a knock-on effect on the companies that they audit. Investors and other stakeholders will be more likely to question the reliability of the financial statements of companies that are audited by these firms.

This could lead to higher costs for companies, as they may need to invest more in their internal controls and risk management systems. It could also make it more difficult for companies to raise capital from investors.

The sanctions against KPMG and PwC are a reminder that the audit function is vital to the financial markets. Investors and other stakeholders rely on auditors to provide an independent and objective assessment of a company's financial statements.

When audits fail to meet the required standards, it can have a significant impact on the markets and the businesses that are affected. The FRC's actions are a step in the right direction to ensure that the Big Four firms take their audit responsibilities seriously.

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KPMG Sanctioned and Fined £14M

The Financial Reporting Council (FRC) today announces sanctions against KPMG LLP (KPMG), a former KPMG partner and four former KPMG employees, following an investigation undertaken pursuant to the Accountancy Scheme. The investigation related to the provision of false and misleading information and documents to the FRC in connection with the FRC’s Audit Quality Reviews of two audits carried out by KPMG: the audit of the financial statements of Regenersis plc for the period ended 30 June 2014 (“the Regenersis audit”); and the audit of the financial statements of Carillion plc for the period ended 31 December 2016 (“the Carillion audit”). 

An independent Disciplinary Tribunal made findings of Misconduct following a five-week hearing during January and February 2022 and sanctions were determined following a hearing in May 2022.
KPMG admitted its liability for the acts of all the individuals and that those acts amounted to Misconduct.

Sanctions

KPMG has been:

• fined £20 million, reduced to £14.4 million to reflect KPMG’s self-reporting, co-operation, and admissions;
• severely reprimanded; and
• ordered to appoint an independent reviewer to conduct a review to consider the effectiveness of KPMG’s current AQR policies and procedures in supporting high quality engagement with the AQR inspectors.

 
Mr Meehan has been excluded from membership of the ICAEW for a period of 10 years, and fined £250,000.

Mr Wright has been excluded from membership of the ICAEW for a period of 8 years, and fined £45,000.

Mr Bennett has been excluded from membership of the ICAEW for a period of 8 years and fined £40,000.

Mr Kitchen has been excluded from membership of the ICAEW for a period of 7 years, and fined £30,000.

Mr Paw was severely reprimanded.

Costs

KPMG agreed to pay £3.95 million towards Executive Counsel’s costs of the investigation together with the costs of the Tribunal.

 

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KPMG Found To Be Untruthful - Whither Professional Standards?

 

The Financial Reporting Council (FRC) published a summary of a tribunal that found a senior partner at KPMG had presented an “untruthful” defence during a disciplinary hearing.

The FRC hearing was convened to investigate KPMG’s misconduct during the sale of bedmaker Silentnight to a private equity fund. The tribunal found that partner David Costley-Wood failed to co-operate with the accounting regulator’s investigators. 

During August of this year, KPMG was fined £13m and incurred costs of over £2.75m for its role in placing Silentnight into a insolvency process during 2011 that allowed private equity firm HIG Capital to acquire it without the burden of a £100m pension scheme liability.

KPMG’s lack of objectivity and “obvious” conflict of interest was the latest in a string of public humiliations including lawsuits and disciplinary complaints relating to audits the firm carried out at Carillion, Rolls-Royce and Conviviality, the owner of Bargain Booze.

This latest sanction was a huge financial hit for the Big Four firm. The tribunal report states that for the first time ever, the tribunal found a respondent had advanced dishonest evidence. 

Costley-Wood, who faced fines of £500,000 for his involvement in the original case, claimed that Silentnight faced a “burning platform” prior to the debt sale agreement. However, the tribunal stated: “The defence put forward by Mr Costley-Wood in relation to the burning platform was a construct invented by him to assist in his defence.”

The FRC said mounting an untruthful defence “seriously risks undermining the regulatory system [and] compounds the original failings”.

Not unreasonably decent, professional, honest members of the ICAEW are asking why the shameful behaviour of the larger firms is not being addressed adequately by the ICAEW.

One to get our blood boiling on a Friday @cheapaccounting @DellaHudsonFCA KPMG offers 'untruthful' defence in Silentnight tribunal https://t.co/beE1CZJZCf

— Simon Denton (@SimonDenton2) October 15, 2021

The subject of ethics brings to mind my application for the role of the ICAEW's Ethics Examiner in 2005. 

As I noted in 2005 I was invited for interview on 19th October, along with 24 other candidates who had applied for the other 11 papers. Prior to the interview I was sent the 5 page Ethics syllabus to read through, together with some other information and a training disc.

I had a one to one 20 minute interview, then a 45 minute panel interview. Seemingly I was the only person to specify Ethics as my first/only choice of paper.

I was told that I would hear by the end of the month, and that if chosen I would have to make a decision quickly; as work on the paper would start in November.

I received an email on the 1st of November which stated that since the interviews the ICAEW had rethought the approach to Ethics, and that there may well not be an assessment of the kind envisaged.

As such no Ethics exam team would be appointed.

Well then!

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KPMG Put on The "Naughty" Step

#KPMG faces record fine of £15m over ‘conflict of interest’ on Silentnight sale to another KPMG client in 2011. The lead KPMG partner will also have to pay a personal fine and will be banned from the profession for some years. - https://t.co/UcZckgNlz0 via @FT

— Rebecca Cave 🇪🇺 🔶 (@TaxwriterLtd) June 22, 2021

 

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KPMG Goes Into Meltdown - #MoanGate

 

The fallout from Bill Michael's (UK Chairman of KPMG) #MoanGate video continues.

The Telegraph reports that relationships at the top of the firm became so toxic under Bill Michael that it was forced to pay for an external coach to sit in on meetings to ensure senior managers would be civil towards each other, according to insiders.

KPMG's leaders were also asked to hand over their phones to investigators trying to root out the source of suspected leaks as the firm’s reputation took a battering over regulatory probes, alleged bullying and aggressive cost cutting, sources said.  

Unsurprisingly he has now resigned. Bina Mehta has stepped in as acting chairman, and Mary O'Connor has taken over Michael's day-to-day executive responsibilities as acting senior partner.

A pretty poor state of affairs by anyone's standards, and not how the firm used to be run when I was a member of staff in the late 1980's!

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"Stop Moaning" - Message To Staff From KPMG Chairman

KPMG’s UK chairman, Bill Michael, has come in for heavy criticism after he told staff to ‘stop moaning’ about their working conditions during the lockdown.

In a virtual meeting with around 500 staff Michael reportedly told staff to ‘stop moaning’ and to ‘stop playing the victim card’. They had raised concerns about pension contributions, pay and bonuses. Questions were also asked about the ranking system of staff performance – from best to worse.

A Financial Times story revealed that Michael later apologised for his choice of words. He told the paper: 

“I am sorry for the words I used, which did not reflect what I believe in, and I have apologised to my colleagues. Looking after the wellbeing of our people and creating a culture where everyone can thrive is of critical importance to me and is at the heart of everything we do as a firm.”

KPMG wasn't like that in my day!

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KPMG Raking It In

KPMG partners receive bumper payouts despite Carillion fallout. https://t.co/8n2CK0b5CJ

— Prem Sikka (@premnsikka) December 5, 2018

KPMG's Irony

How ironic that one of the world's leading accounting firms, KPMG (my old firm in fact), failed to pay any of its 11,000 UK staff yesterday (as it was meant to have done).

Payroll World reports:

"KPMG says it “holds its hands up” to a human error at the firm that has led to its entire UK workforce not being paid on time.

Normally staff at the big four accountancy firm are paid on the 29th. If that falls on a weekend, as it does this month, they are paid the Friday before. 

But a human error has led to 11,000 staff having to wait until Monday to receive their wages.

A spokeswoman for KPMG told Payroll World that the problem was not with its supplier but originated within the firm.

“We hold our hands up over this, it was caused by a human error within KPMG,” she said.
An email was sent to all staff this morning explaining the problem.

“We hope we told people in time to adjust any direct debits or payments from their accounts if they needed to. Our HR and finance teams are ready to help anyone who may face any hardship as a result of the mistake,” she said."

KPMG may need to follow their own advice re payroll systems:

"Review the systems – how robust are systems around payroll and what safeguards are in place to ensure that the correct amounts of tax and NIC are properly accounted for?"

Interestingly KPMG issued a press release in March about RTI and a survey conducted by KPMG which said:

"The survey also revealed that many employers were still relatively “low tech” in their approach to payroll: a surprising 25 percent of respondents said they did not use software to run their payroll, 22 percent still make payments by cheque and nearly half (49 percent) said that their payroll was not linked to their HR systems.

Over four in ten respondents (42 percent) said they had not reviewed their payroll processes within the last year and almost a fifth (18 percent) said they had not done so for three or more years." 

I am a firm believer in creating an opportunity from a crisis (or in this case a cock up), this cock up provides KPMG with an ideal opportunity to review its payroll systems.