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KPMG fined £6m and severely reprimanded over audit

1st May 2019
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KPMG office
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Britain’s audit watchdog has sanctioned KPMG and two partners for misconduct in relation to the auditing of automobile insurer Equity Syndicate Management (ESM) Limited.

KPMG has been fined £6m, its partner Mark Taylor (no relation to author) and former partner Anthony Hulse £100,000 each, the FRC said in a statement on Tuesday. In a further punishment, Taylor must also have a second partner review his audits until the end of 2020.

Douglas Morgan, a former director of ESM, has been banned from CIMA for two years.

An independent tribunal made findings of misconduct following a hearing in December 2017 and sanctions were determined following a hearing in October 2018.

KPMG was severely reprimanded and will undertake an additional internal review and report to the FRC on certain aspects of its 2018 audits of insurance undertaking.

"While [a reprimand] has no effect financially, it is a stain on their reputation and will be considered by other companies when they are thinking about changing their auditors,” the FRC said.

The sanctions followed the FRC’s investigation into the auditing of Lloyd’s of London car and motorcycles insurer Equity Red Star for accounts dating back to 2007, 2008 and 2009. ESM was the management agent and a corporate member of the Lloyd’s of London, trading as Equity Red Star. In 2010 Equity Red Star, a UK subsidiary of Insurance Australia Group (IAG) reported to a £194m loss after not having sufficient cash to cover claims.

The findings against Hulse relate to the 2009 audit, while the misconduct of KPMG and Taylor arose from KPMG’s 2008 and 2009 audits, the FRC said.

Taylor was an associate partner and the responsible individual for the audit, while Hulse was the audit engagement partner for the ultimate UK parent undertaking. 

Questions were asked about the audits, in particular the reserving, the sufficiency of evidence obtained and the unqualified opinions given. A tribunal found that in both years insufficient enquiries were made about the claims file review process and warning signs of deterioration in claims reserves were ignored.

Morgan, an in-house accountant, was criticised for handling the review process in a "wholly improper" way. He failed to keep proper records and to properly disclose information to the company's board and auditors, the FRC said.

The fine, one of the highest dished out by the FRC in its history, is the latest in a line of debacles for KPMG, which is facing calls to be broken up along with Deloitte, EY and PwC.

Prior to the regulator’s imminent disbanding, the FRC is also is investigating KPMG’s audit of the government contractor Carillion, which collapsed under £1bn of debt last year.

The FRC found an “unacceptable deterioration” in KPMG's work and said it would be subject to closer supervision in a review published June 2018.

In a statement, KPMG said it was “disappointed” its 2008 and 2009 audits did not meet standards set by the regulator.

“Since this work was conducted we have changed our insurance audit approach considerably, including how we work with actuaries when auditing insurance claims reserves,” the firm said. “The tribunal accepted that KPMG has taken, and continues to take, steps to improve audit performance and in its last inspection report, the FRC acknowledged our work in this area as an example of good practice.”

Replies (9)

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By Trethi Teg
01st May 2019 08:59

If Mark Taylor was fined £100,000 why was he not excluded from membership. I have seen many exclusions for much less significant matters where a fine of £3000 has been imposed.

For Mr Taylor this is probably a months pay and the inconvenience on having one of his mates tick off his files.

Also there is no "stain on their reputation" as none of the Big 4 or 5 have any audit reputation remaining.

Once again there is one rule for the small and one rule for the "Elite".

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Replying to Trethi Teg:
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By Justin Bryant
01st May 2019 09:36

If you're suggesting MT should be fined £6m rather than KPMG then that's ridiculous. No-one would be an audit partner were that the case. As it is, £6m is a pretty huge incentive to improve your audits (or possibly not do auditing at all). I wonder who gets that money?

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Replying to Justin Bryant:
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By Trethi Teg
01st May 2019 11:23

I am not suggesting that Mr Taylor pay £6m. I am simply saying that a) £100,00 is not a large fine for him and b) he should have been excluded.

KPMG have 623 partners in UK so that works out at average of £9,630 per partner.

Each partner earns an average of £601k per annum which means that the fine amounts to 4 days salary each.

Therefore the fine does not represent a "huge incentive" considering the damage done to the profession by ongoing audit scandals.

I am not sure who gets the money - that is a very good question and one I would be very interested to know the answer to.

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By AnnAccountant
02nd May 2019 09:16

That picture looks like the former Manchester office - before they moved to the new place above the Dutch Pancake House

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By winton50
02nd May 2019 11:05

So what. This is a drop in the ocean for them and they won't care, or moderate their behaviour.

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By tedbuck
02nd May 2019 12:11

It isn't going to do their fee income much harm as all the others are pretty much in the same boat so who could you choose?
Since audits seem to be so pointless one rather wonders why they are bothered with.

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Chris M
By mr. mischief
02nd May 2019 12:13

Hopefully this is a sign of bigger things to come. About time these guys got their fining boots on!

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By Mr J Andrews
02nd May 2019 13:28

So , Morgan the in house accountant failed to keep proper records.
Are you taking note HMRC ?

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By Brend201
02nd May 2019 15:17

The delay in hearing cases and issuing judgements seems to suit the culprits - not just with accountants but also the betting companies etc. "These issues occurred a long time ago and we have improved since then so it is not relevant what the outcome was" is the usual response, including from KPMG in this case.

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