KPMG fined £6m and severely reprimanded over audit
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.
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.”