The Financial Reporting Council has opened an investigation into KPMG’s audit of Rolls-Royce’s financial statements following the engineering firm’s decision to settle a bribery case with the Serious Fraud Office (SFO).
In a statement the accountancy watchdog announced it will examine KPMG’s conduct in relation to its audits of the Rolls-Royce accounts in 2010, 2011 and 2013 under the Audit Enforcement Procedure.
The decision follows January’s SFO announcement that Rolls-Royce had agreed to pay £671m to settle corruption and bribery allegations as part of a Deferred Prosecution Agreement (DPA).
Once the FRC has gathered enough data on KPMG's actions relating to the audits it will make a decision as to whether to refer the Big Four firm to an independent tribunal, and it will then be down to the tribunal to hear the case and apply sanctions if required.
Reacting to the investigation announcement a KPMG spokesperson said it was “important that regulators acting in the public interest should review high-profile issues.
“We will co-operate fully with the FRC's investigation, which follows the SFO's investigations into Rolls-Royce.
“We are confident in the quality of all the audit work we have completed for Rolls-Royce, including the 2010-13 period the FRC is considering.”
KPMG will stand down as Rolls-Royce’s auditor after 26 years following an FRC rule change inviting companies to change auditors every 10 years.
Bribery and corruption scandals
The FRC investigation into KPMG was kicked off by January’s DPA between Rolls-Royce and the SFO.
A DPA is a statutory means by which a company can account to a court for conduct without suffering the full consequences of a criminal conviction, which might include international exclusion from competing for public contracts.
The agreement relates to allegations of bribery and corruption scandals involving intermediaries in overseas markets such as Indonesia, Thailand, India, Russia, China, Nigeria and Malaysia.
Rolls-Royce first passed information to the fraud office in 2012 after facing allegations of malpractice in Indonesia and China, and the SFO launched a formal investigation.
In January 2017 the FTSE 100 engineer said it had reached a voluntary agreement to suspend prosecution if it fulfilled certain requirements. These included payment of penalties to the SFO, the US Department of Justice and the Brazilian government.
According to the Department of Justice, Rolls-Royce admitted to making more than $35m in payments and paying officials at state-run energy companies in Angola, Azerbaijan, Brazil, Iraq, Kazakhstan and Thailand to win contracts.
Along with agreeing a record settlement for this type of agreement, chief executive Warren East apologised "unreservedly" for the bribery schemes.