The FRC issued its largest ever fine of £14.4 million in connection with misconduct by KPMG during audits of Carillion and Regenersis.
Background
On 25 July 2022 the FRC announced the imposition of sanctions against KPMG, a former KPMG partner and four former KPMG employees following findings of misconduct at a hearing in January 2022.
The FRC's investigation commenced in November 2018 after KPMG self-reported certain matters relating to the review of the 2016 Carillion audit. The allegations of misconduct were considered during a five week hearing starting in January 2022 before a FRC disciplinary tribunal ("the Tribunal"). The members of the Tribunal were independent of the FRC and either legally qualified, accountants/actuaries or lay persons.
The findings of misconduct did not relate to the performance of the audit but to the provision of false and misleading information and documents to the FRC in response to FRC inspections (known as Audit Quality Reviews (AQR)) of the Carillion and Regenersis audits. The Tribunal concluded that the misconduct included the creation of false meeting minutes and making false or misleading representations to the AQR inspectors.
The Tribunal found that the KPMG employees involved deliberately misled the FRC. Accordingly, the tribunal made a number of findings of misconduct involving breaches of the fundamental principle of Integrity contained in the ICAEW Code of Ethics.
At a further hearing in May 2022, the sanctions imposed by the FRC against KPMG included:
- a £20 million fine reduced to £14.4 million once mitigation was taken into account;
- severe reprimand; and
- an order to appoint an independent reviewer to consider the effectiveness of KPMG's current AQR policies and procedures in supporting high quality engagement with the AQR inspectors.
In addition, the audit partner of the Carillon account was fined £250,000 and suspended from ICAEW for a period of 10 years. Three other members of staff were fined between £30,000 and £45,000 and suspended for seven or eight years. A fifth was severely reprimanded.
Mitigating factors
The Tribunal commented that the conduct of concern undermined the effectiveness of AQR as a mechanism for regulating audits and auditors. Nonetheless, the Tribunal accepted the following as mitigation:
- The misconduct was admitted and reported proactively to the FRC;
- KPMG's co-operation with the FRC’s inquiry; and
- The steps taken by KPMG to amend its policies and procedures to mitigate against a reoccurrence.
The decision is a clear statement by the FRC that it takes very seriously failures by both individuals and organisations to act with honesty and integrity.
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