KPMG fined over £3m for Rolls-Royce audit failingsby
In the latest of a series of failings, KPMG has been fined £3.375m and severely reprimanded by the Financial Reporting Council over the audit of aerospace manufacturer Rolls-Royce.
In a case that centred on KPMG’s knowledge of Rolls-Royce’s “bribery payments” to land contracts in India, accounting regulator the Financial Reporting Council (FRC) sanctioned the Big Four firm over the audit of the aircraft manufacturer for the 2010 financial year.
Anthony Sykes, who was KPMG’s statutory auditor for Rolls-Royce from 2008 to 2012 and signed the report, was also hit with a £150,000 fine (adjusted to £112,500 for admissions) and severely reprimanded.
In addition to the financial penalty, KPMG will also pay executive counsel’s costs of the investigation of £726,000.
The fine, which was reduced from £4.5m to £3.375m due to early payment, is the latest in a litany of penalties against the Big Four firm and comes only a week after KPMG received a £14m fine for misleading the FRC over the audit of collapsed outsourcer Carillion.
Jon Holt, chief executive of KPMG in the UK, said: “When I came into my role as chief executive, I said that we would move swiftly to resolve and learn from our outstanding regulatory cases. I am pleased we have now concluded this historic matter and I’m sorry that elements of our work in the FY2010 audit of Rolls-Royce Group plc did not meet the professional standards required.
“In addition to resolving legacy cases, we are also investing significantly in training, controls and technology to improve quality and resilience in our audit practice.”
Issue with intermediaries
KPMG’s audit failings at the aerospace company centred on two sets of payments made by Rolls-Royce to agents in India, amid allegations of bribery and corruption. This resulted in Rolls-Royce paying millions to settle US and UK criminal investigations resulting from the use of intermediaries.
At the time of the 2010 audit, the FRC said that KPMG was aware of the allegations of bribery and malpractice through the use of intermediaries and “advisers” in the defence field and were aware of the matters as the auditor of another defence company.
The timeline set out by the FRC outlined that in May 2010 the Rolls-Royce ethics committee considered the findings of an investigation into the use by the company of agents in India when the use of intermediaries in connection with Indian Government defence contracts was restricted by the Indian authorities.
However, the FRC said that KPMG was aware by 11 June 2010 that there might have been an issue with Rolls-Royce and an agent in India, which didn’t comply with the legislation. Less than a month later, the Big Four firm knew that there had been two payments to an Indian agent: one of £3.32m and another in 2006 of £1.85m to secure the return of a list of agents that had been taken from Rolls-Royce’s Indian branch office.
Rolls-Royce’s conduct became the subject of a Serious Fraud Investigation and in 2017 the aerospace company entered a deferred prosecution agreement with the SFO and paid £497.25m.
Failure to exercise professional scepticism
KPMG accepted that it failed to include a summary of the “Indian Issues” and the results of their discussions with management and others in the audit documentation.
This, the regulator ruled, amounted to serious failures to exercise professional scepticism, to obtain sufficient, appropriate audit evidence and document this on the audit file, and to achieve sufficient engagement quality control.
However, the FRC notes that it is not alleged that the failings in question caused any misstatement in the FY2010 financial statements to go undetected.
At the time of the audit KPMG charged an audit fee of £431m. It audited Rolls-Royce from 1990 to 2017.
Claudia Mortimore, deputy executive counsel to the FRC, said: “It is essential that auditors are alive to the risks of companies’ non-compliance with laws and regulations, and conduct work in this area with care and sufficient professional scepticism. This is particularly so when the audited entity is in a sector where such risks are known to be prevalent.”