August 19, 2022

KPMG UK Somehow Won’t Be Getting a Record Fine From the Financial Reporting Council For Carillion Mess (UPDATE)

[UPDATE] The Queen’s KPMG was finally, officially fined £14.4 million by the Financial Reporting Council earlier this morning for all the stupidity that happened during the 2016 audit of collapsed construction and services company Carillion, as well as for the mistakes that occurred in its 2014 audit of IT software company Regenersis.

KPMG UK and the FRC had agreed upon the financial punishment last May (see below)—a £20 million fine reduced to £14.4 million to reflect KPMG’s self-reporting, cooperation, and admissions of wrongdoing. The firm also agreed to pay additional costs of £3.95 million, the FRC announced today. It’s the largest fine KPMG has received from the UK’s audit cops but not the largest fine ever doled out to an audit firm across the pond. That went to Deloitte UK in September 2020.

But what wasn’t known until today were sanctions, if any, given to five former KPMGers—Carillion lead auditor Peter Meehan; senior managers Alistair Wright, Richard Kitchen, and Adam Bennett; and junior auditor Pratik Paw—who testified during a five-week tribunal hearing in January and February, which revealed that during inspections of the Carillion audit, KPMG auditors misled the FRC by creating false documents, among other things. All five were found guilty of misconduct.

The FRC released the following summary of the tribunal’s findings today:

Regenersis AQR inspection

The Tribunal found that there had been Misconduct in respect of the Regenersis AQR [audit quality review] inspection, in that Mr Wright and Mr Bennett had:

  • created or had a role in creating a false or misleading audit working paper on goodwill (“the Goodwill Paper”),
  • made or had a role in the making of false or misleading representations to the AQR inspectors as to when and in what circumstances the Goodwill Paper was created,
  • made false representations in the Goodwill Paper that certain audit work had been performed during the Regenersis audit.

And that in each case they were party to the deliberate misleading of the FRC’s AQR inspectors, and that their conduct was dishonest.

Carillion AQR inspection

The Tribunal found that there had been Misconduct in respect of the Carillion AQR inspection concerning minutes of year-end ‘clearance’ meetings, and an audit working paper on the selection of contracts for audit testing (the CCS Paper), that were presented to the AQR inspectors as having been created during the Carillion audit.

In respect of the meeting minutes the Tribunal found that Misconduct had been committed by Mr Meehan, Mr Wright, Mr Kitchen, Mr Bennett, and Mr Paw in that:

  • Mr Wright and Mr Paw had created, and Mr Meehan, Mr Kitchen and Mr Bennett had assisted or encouraged the creation of, false or misleading meeting minutes, intending to mislead, or as a party to the deliberate misleading of, the AQR inspectors or being reckless as to whether they would be misled; and
  • They had made, or connived in or were knowingly associated with making, certain false or misleading representations to the AQR inspectors as to when and in what circumstances the meeting minutes were created, intending to mislead, or as a party to the deliberate misleading of, them or being reckless as to whether they would be misled.

And that Mr Meehan, Mr Wright, Mr Kitchen, Mr Bennett were party to the dishonest misleading of the AQR inspectors. Mr Wright had already admitted these allegations, and that his conduct was dishonest.

The Tribunal found that Mr Paw, by implementing without question the instructions given to him by Mr Wright to create false minutes, acted without the integrity required of an accountant and became a party to the deliberate misleading of the AQR. However, Mr Paw was not found to have acted dishonestly.

A further allegation of Misconduct in relation to the content of the meeting minutes made by Executive Counsel against Mr Meehan, Mr Wright and Mr Kitchen was found not proved by the Tribunal.

In respect of the CCS Paper the Tribunal found that Misconduct had been committed by Mr Meehan, Mr Kitchen and Mr Bennett in that:

  • Mr Kitchen had created, and Mr Meehan and Mr Bennett had assisted or encouraged the creation of a false or misleading audit working paper on the selection of construction contracts;
  • They had made, or had connived in or were knowingly associated with making, false or misleading representations as to when and in what circumstances the audit working paper was created.

The Tribunal found that Mr Meehan and Mr Bennett acted without the integrity required of an accountant, but not dishonestly.  Mr Kitchen’s conduct was found to have been dishonest.

The Tribunal also found, in respect of Mr Kitchen alone, that he had made false representations in the CCS Paper that certain audit work had been performed during the Carillion audit and that his conduct was dishonest.

KPMG admitted its liability for the acts of all the individuals set out above and that those acts amounted to Misconduct.

Of the five ex-KPMG defendants, four received fines and multi-year suspensions from the profession:

  • Meehan was fined £250,000 and excluded from membership of the Institute of Chartered Accountants in England and Wales for 10 years.
  • Wright was fined £45,000 and excluded from membership of the Institute of Chartered Accountants in England and Wales for eight years.
  • Bennett was fined £40,000 and excluded from membership of the Institute of Chartered Accountants in England and Wales for eight years.
  • Kitchen was fined £30,000 and excluded from membership of the Institute of Chartered Accountants in England and Wales for seven years.

Paw only received a severe reprimand from the FRC. Another ex-KPMG auditor, Stuart Smith, who was the audit engagement partner for Regenersis, agreed to a £150,000 fine and a three-year ban from the profession as part of a settlement with the FRC in January.

[Original article below posted on May 12.]

I’m not a betting man, and that’s a good thing because, while not official yet, I would have bet my house on KPMG UK being fined more than £15 million for the whole Carillion audit fiasco.

The Financial Times reported this afternoon:

KPMG is set to be hit with its biggest-ever fine in the UK after a tribunal found that its auditors deliberately misled regulators during routine inspections of its work.

The largest fine KPMG has ever had to pay the Financial Reporting Council was £13 million last August for serious misconduct in its role in the sale of bed manufacturer Silentnight to a private equity fund.

Back to FT’s reporting:

The tribunal heard on Thursday that KPMG and the Financial Reporting Council had agreed the firm should be fined £20mn for its misconduct, but that this should be reduced to £14.4mn to reflect mitigating factors and KPMG’s admissions of wrongdoing. KPMG has also agreed to pay £4.3mn in costs.

Five individual defendants — Peter Meehan, who led the audit of collapsed government contractor Carillion; senior managers Alistair Wright, Richard Kitchen and Adam Bennett; and junior auditor Pratik Paw — were all found guilty of misconduct.

Another former KPMG auditor Stuart Smith accepted a £150,000 fine and a three-year ban from the profession as part of a settlement with the FRC in January.

The tribunal held a five-week hearing in January and February that focused not only on the major screw-ups and misconduct by KPMG and its auditors during the firm’s 2016 audit of Carillion, the construction and services company that collapsed nearly four years ago, but also failures in KPMG’s 2014 audit of Regenersis, an IT software company.

Smith, who was the audit engagement partner for Regenersis, was supposed to testify during the course of the hearing, but he got out of doing that by settling with the UK’s audit cops and accepting his punishment.

FT continued:

[The tribunal] ruled that during the inspections KPMG auditors created documents, including meeting minutes, spreadsheets and assessments of goodwill, but passed them off as having been produced before the accounts were signed off.

Summarising the tribunal’s findings, Mark Ellison QC for the FRC said Meehan, Wright, Kitchen and Bennett had “acted deliberately and dishonestly in the creation of false documents and the making of false representations” to the FRC. Paw acted without integrity but not dishonestly, the tribunal found.

The monetary amounts of the five ex-KPMG auditors’ punishments have yet to be decided. According to FT, the FRC called for Meehan to be fined £400,000 and be banned from the profession for 15 years; however, Meehan’s lawyers said he should be fined £250,000 and banned for 10 years. Wright, Kitchen, and Bennett are facing possible £100,000 fines and 12-year bans, with a 10% discount for Wright because he had admitted to some of the allegations against him. Paw, who was not yet a qualified accountant at the time, is facing a £50,000 fine and a four-year ban, FT reported.

If this all pans out, and it could be made official tomorrow, Deloitte will still hold the record for highest fine issued by the FRC at £15 million for its shoddy auditing of Autonomy, the UK-based software company that was acquired by Hewlett-Packard in 2011 and was involved in an epic accounting fraud.

We’ll update this article once the punishments are officially handed down to the Queen’s KPMG and its former auditors.

KPMG faces £14.4mn fine for misleading UK regulators over Carillion audit [Financial Times]

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