Our favorite four-letter Big 4 firm is in danger of having to pay an eight-digit fine in the U.K. for dropping the ball on making sure Bank of New York Mellon complied with rules on keeping client assets safe.
Accounting giant KPMG should be fined 12.5 million pounds ($15.9 million) or more for misconduct over reports on Bank of New York Mellon Corp., a U.K. regulator said Tuesday. KPMG said the fine should be just a fraction of that size, at 1.4 million pounds.
The Financial Reporting Council’s request — and KPMG’s response — were outlined Tuesday at a hearing in London, where a tribunal will decide what’s an appropriate sanction for the case. KPMG, which has admitted misconduct, would get a 30 percent discount on the fine for cooperation with the regulator.
But before we get to KPMG’s response, let’s go back to this past September when KPMG and partner Richard Hinton admitted to misconduct after an FRC investigation into 2011 reports on client assets held by BNY Mellon and its London branch.
At their peak, the client assets held by the bank were worth more than £1 trillion.
In April 2015, BNY Mellon was fined £126 million by Britain’s Financial Conduct Authority for failing to keep customer money safe during the financial crisis. And KPMG, as BNY Mellon’s auditor, was supposed to be responsible for reporting to the FCA in 2011 that BNY Mellon was complying with the FCA’s rules on client assets.
The FRC investigation, which began in June 2015, found that KPMG and Hinton “failed to give adequate consideration on whether the records of custody relationships maintained by BNY Mellon were compliant with certain rules.”
In addition, KPMG and Hinton “failed to undertake sufficient audit procedures to support the opinions set out in the 2011 client asset reports made to the FCA,” the FRC said last September.
The FRC and KPMG couldn’t agree on what sanctions should be imposed on the firm, so that decision will be made by a disciplinary tribunal.
OK, back to today’s tribunal hearing, where the FRC said KPMG should have to pay a record fine of £12.5 million because KPMG’s conduct was “truly exceptional.” KPMG’s response: WHAT? We ain’t paying that.
The FRC’s proposed fine is an “extravagant” and “gargantuan” penalty, and the misconduct involved in the BNY Mellon case was unintentional and didn’t involve any criminality, KPMG lawyer Bankim Thanki said at the hearing.
So, we await the tribunal’s verdict. The largest fine ever levied by the FRC was £10 million (reduced to £6.5 million) to PwC for botching the audit of retailer BHS, which eventually went belly-up. My gut tells me the tribunal hands KPMG a fine somewhere between £10 million and £12.5 million.