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KPMG to be fined £14m over falsifying Carillion documents

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KPMG is set to receive one of the biggest ever fines from the Financial Reporting Council after its auditors deliberately provided audit inspectors with misleading information from the audits of Carillion and Regenersis.

16th May 2022
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Big Four accountant KPMG is facing a £20m fine from the Financial Reporting Council (FRC) following a five-week tribunal which heard how its auditors falsified documents, including forging spreadsheets and meeting minutes after the accounts were signed off.

The fine will be reduced to £14.4m due to KPMG's co-operation and admission that it misled the regulator.

At the end of last week the London tribunal hearing found all five former KPMG auditors guilty of misconduct over the creation of false documents and severely reprimanded KPMG. 

A violation of our processes

KPMG’s chief executive Jon Holt said he was “saddened that a small number of former employees acted in such an inappropriate way”. He went on to say that it is “right that they - and KPMG - now face serious regulatory sanctions”.

At the start of the tribunal in January, Holt said it was clear KPMG had misled the regulator. He echoed this in a statement after the verdict, calling the wrongdoings of the former KPMG employees as “unjustifiable and wrong”, a violation of internal processes and a “betrayal of our values”.

“We have worked hard, and with complete transparency to our regulator, to assure ourselves that this matter does not represent the wider culture or practice of our firm,” he added.

Fines to be confirmed in the coming weeks

The Guardian reported that the FRC will consider penalties over the coming weeks for the individual KPMG auditors: Peter Meehan, Alistair Wright, Richard William Kitchen, Adam Bennett, Pratik Paw and Stuart Smith. 

According to The Financial Times, audit leader Peter Meehan could be fined up to £400,000 and face a 15-year ban, but his lawyers are trying to reduce the sanction to £250,000 and a 10-year ban. 

Paw, the former junior auditor at KPMG, could be fined £50,000 with a four year ban from the profession. In potential mitigation, The Financial Times reported that the junior auditor claimed he didn’t realise he was doing anything wrong and was only following instructions of senior colleagues.

The FRC also called for Wright, Kitchen and Bennett to face 12 year bans and £100,000 fines. Stuart Smith, meanwhile, reached a settlement with the FRC in January and has accepted a three-year ban from the profession accompanied by a £150,000 fine.

Massive fine

Since the fine was reduced from £20m to £14.4m, Deloitte still retains the undesired record for its £15m fine over the audit of Autonomy as the biggest in the sector.  

Richard Murphy, professor of accounting practice at Sheffield University, said that the fine - which is 10 times the 2016 audit fee - would “be acceptable if it was a one off, but we know it was not.

“Despite that failing in 2021 KPMG audited 28 of the FTSE 100 - more than anyone else. How come? And what does that say about audit, expectation of audit and client expectation?

Murphy laid the blame for thes systematic failings on the whole of the audit sector rather than KPMG alone. “The failing was in no small part because the ICAEW issued guidance saying that hollowed out firms - with parent company assets well in excess of group reserves - could legally pay dividends based on the parent company alone. Shouldn't the ICAEW be in the dock as well? And why is there no likelihood in the promised Audit Bill that this will change?

“Has audit reached the end of the road and is simply in terminal decline as all shrug their shoulders and watch capitalism collapse?”

​​​​​Lord Prem Sikka, the emeritus professor of accounting at the University of Essex, told AccountingWEB that this sanction comes after a long line of fines so he's also sceptical that the £14m penalty will result in any positive change. 

"Previous fines have not secured any positive change in the organisation's culture as the lure of profits and personal bonuses is too strong. It is hard to see how this will make any lasting difference. 

"The £14m fine is puny and a tiny part of the firm's £2.35bn UK revenues. In any case, it is likely to be passed on to clients. KPMG and other big firms play cat-and-mouse games with regulators and have shown a willingness to game the system. A multipronged regulatory response is needed. 

"The partners responsible for nefarious practices need to be made personally liable and must face criminal charges. Firms who continue to deliver poor audits need to banned from securing new audit business for at least five years. Serial offenders must be forcibly closed."

The drama continues

The drama surrounding the Carillion collapse is far from finished. There are two other separate Carillion investigations, with one probing KPMG’s audit of the outsourcer and the other scrutinising the conduct of Carillion’s former finance directors.

KPMG also faces a £1.3bn lawsuit over the failed outsourcer Carillion for failing to spot misstatements in the group’s accounts and missing multiple red flags. The Official Receiver is suing the Big Four firm for the same amount Carillion paid out in dividends, advisory fees and losses as it continued to trade. 

The lawsuit argues that KPMG “failed to maintain professional independence”, laying the blame at Meehan's feet, claiming he “repeatedly accepted hospitality from and offered hospitality to Carillion and its senior management”.

When Carillion plunged into administration in January 2018, it had £29m cash, liabilities of nearly £7bn. The collapse wiped out several thousand infrastructure jobs in its wake and prompted the government to promise audit reforms that are only now coming to fruition. Last week’s Queen’s speech confirmed the creation of a new regulator, the Audit, Reporting and Governance Authority (ARGA) to replace the FRC and the introduction of shared audits. 

KPMG has been contacted for comment. 

 

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Replies (29)

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By Hugo Fair
16th May 2022 21:59

"KPMG has been contacted for comment" ... zzzzzzzZ (Sorry did you say something? No?) zzzzzzzzZ!

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By MCV71
17th May 2022 06:40

B-b-b-but I thought it was the QBE accountants who were cowboys?

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By Trethi Teg
17th May 2022 07:56

Those involved were effectively guilty of fraud or conspiracy.

They should be excluded from ICAEW permanently.

As discussed KPMG should be banned from engaging in audit activity totally.

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Replying to Trethi Teg:
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By johnjenkins
17th May 2022 11:54

Perhaps even fixed penalty notices.

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Replying to Trethi Teg:
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By christine johnson
17th May 2022 14:34

The big firms are trashing the reputation of auditors; smaller firms are doing all they can to comply the rules and are fed up with being tarnished with the same brush as large auditors. Take for example the recent Patisserie Valerie case. Falsifying documents should deserve a prison sentence and they have not followed the Ethical Standards of ICAEW that applies to all firms of Chartered accountants

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Replying to Trethi Teg:
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By Moo
17th May 2022 15:11

Suspect in USA they would be looking at jail time.

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A Putey FACA
By Arthur Putey
18th May 2022 13:10

... and from lucrative public sector contracts

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By Justin Bryant
17th May 2022 09:45

Scandals at large City firms seems to be the norm these days. See here another recent case: https://www.lawgazette.co.uk/news/breaking-enrc-secures-partial-high-cou...

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Replying to Justin Bryant:
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By Justin Bryant
18th May 2022 12:58

Update on the above other City professional services scandal: https://www.lawgazette.co.uk/news/dechert-ex-partner-disgrace-to-profess...

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Replying to Justin Bryant:
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By Justin Bryant
20th May 2022 09:47
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By AndyFroggatt
17th May 2022 09:52

Surely as fraud this is criminal conduct? A prison sentence should surely be handed out. Making a mistake, not doing sufficient work, being misled are all reasons for financial penalties but creating documents is a deliberate act.

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Replying to AndyFroggatt:
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By Justin Bryant
17th May 2022 10:01

But you are forgetting this is the Big 4. Only the small fry and little people get such proper punishment.

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By WallyGandy
17th May 2022 10:23

Agreed. For years when calling ICAEW or ACCA and say you're a sole practitioner they say... "what's that?"

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By Duggimon
17th May 2022 09:58

It's not enough, a fine is not enough, the delivery of a few scapegoats is not enough.

These people did not decide to do this because they're renegades, they did this because they work for one of the large firms for whom the goal of audit work is to deliver what the clients want and harvest the maximum in fees for doing so.

The goal of audit is to provide the shareholders with assurance that the directors are properly running the company. With these firms still allowed to audit, albeit with some of their employees who used to audit under their specific instructions now excluded, how on earth can they ever provide this assurance?

They deliberately lied and falsified audit documents and there is no way employees just made the decision themselves to do so. Remove their audit status entirely, I don't want them ever engaged in the audit of any company I invest in.

Of course, the sad thing is the other three of the big four, and no doubt the firms just outside the big four, are no better, KPMG are just the latest ones to be caught. Even a £15m fine and the exclusion of some employees feels like a very toothless sanction though.

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By tedbuck
17th May 2022 10:11

Still feels to me that ICAEW sit by the side of things and let the FRC take the actions, but shouldn't the ICAEW be having a go at these guys? They certainly seem to have the time and resources to demolish small offenders (rightly so) but not ok if the big boys are allowed to get away with it. Surely there must be a management team in KPMG - where were they during all these audits? Have they tooth-combed the rest of their audits to ensure that the same thing hasn't happened elsewhere and been covered over?
Generally, in large organizations, a culture runs through them so one would be very surprised if Carillion and Regenersis were the only ones where such problems arose. Or does that open a very nasty can of worms?
I am glad I am not a large company looking for an auditor - apart from the obvious difficulty they are all going to be charging the earth to pay for their fines - and one has to ask if that is right.

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By DavidThrelfall
17th May 2022 10:28

Nothing ever changes its the same old same old with the Big 4-
Audits of poor standard-
Complaints made-
Miniscule Fines Paid out in comparison to fee income they charge which are reduced due to co-operation-
Then we hear that the staff who did it don't work there anymore or our procedures are better now than then.
Its not changing and its the same excuses trotted out time after time.
Small audit firms producing this sort of work would be before the Admissions and Licencing Committees of ICAEW and ACCA and removed from audit status immediately!!!

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Replying to DavidThrelfall:
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By flightdeck
18th May 2022 14:03

That's the thing isn't it? Nothing is changing.

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By Ben Alligin
17th May 2022 10:36

Bless him, Pratik Paw opted for the classic defence 'Befehl ist befehl'!!

We all know how that turned out.

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By Tax bot
17th May 2022 10:43

KPMG - the next Arthur Andersen?

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By louief
17th May 2022 10:56

"the junior auditor claimed he didn’t realise he was doing anything wrong and was only following instructions of senior colleagues."

As a junior, how does he protect himself in this case if he really knows nothing?

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Replying to louief:
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By unclejoe
17th May 2022 14:46

The question to ask is should the junior have known what he was doing was wrong, given his position and training. If he was involved in falsifying documents he should have known it was wrong and if he did not, then he was incompetent. I was once asked (told) to change figures in a report I had prepared. I knew the figures I had prepared were correct and refused to sign the changed figures. Within two weeks I was moved to a "non-job" position. An invideous position to be in, and one I guess many may have experienced. Honesty and integrity are important: "I was told to do it" does not wash.

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By Arcadia
17th May 2022 11:02

I suspect the cost to KPMG in terms of lost reputation and opportunities is much greater than the fine. Similarly the impact on recruitment and staff morale will impose a huge cost which for the sake of resourcing the extra effort into audit quality, KPMG would have taken that. The attitude that these fines are trivial and probably shrugged off by these firms ignores the human factor. The shame and horror at KPMG are what will change attitudes. Banning firms from tendering, closing firms and other draconian measures are over the top. Are these sorts of penalties meted out to the directors of failed companies, to the banks that failed us, to the governments that failed us?

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Replying to Arcadia:
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By Rgab1947
17th May 2022 11:40

Shame? The Big 4 don't understand that word. They are at it all the time.

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Replying to Arcadia:
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By Moo
17th May 2022 15:21

What shame and horror? I'm sure in some PLC board circles this will be seen as a recommendation for the 'audit' firm as being one that put's clients interests above truth and integrity.

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By Rgab1947
17th May 2022 11:39

A sole practitioner would have been excluded.

Then a £14 million fine for basically criminal conduct? On their turnover and profits chicken feed.

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By ireallyshouldknowthisbut
17th May 2022 12:16

There seems to be some confusion in the comments.

FRC cant exclude the errant auditors from the ICAEW, that is a matter for the ICAEW.

ICAEW take an unfeasible long period of time to deal with these matters so come back in about 2-3 years and we might know what they have done about it.

As an ex-KPMG staffer I am not terribly surprised by this. The people I trained with would now be partner level, and you got on by finding solutions to signing things off, rarely for finding problems. I recall being warmly thanked by a client for uncovering a fraud around bonuses (figures massaged to give a bigger bonus) and getting nothing but grief from the partner for booking an extra day on the job to get to the bottom of it and attend the closing meeting for which I was not in the budget as it wasn't material.

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Replying to ireallyshouldknowthisbut:
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By paul.benny
18th May 2022 13:50

ireallyshouldknowthisbut wrote:
ICAEW take an unfeasible long period of time to deal with these matters so come back in about 2-3 years and we might know what they have done about it.

You're not wrong about the timing. The trouble is that the institute's disciplinary process has to wait until legal processes (courts, FRC) have concluded, lest the institute's verdict taints or is called into question by the verdict of the courts.

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By HLB
17th May 2022 18:16

Without tighter restrictions imposed by Government the only way they will be affected is if their clients walked away due to them wanting to have an audit they can rely on. But where do they go as all the big4 seem to be as bad as one another? They also seem far too big and powerful to be controlled by the professional bodies. In fact it would seem that the professional bodies are controlled by the big 4. Not a good place for the profession to be.

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By nlb
17th May 2022 19:06

I doubt a small practitioner turning over £150k would be fined only £894 (0.6% per KPMG) for a misdemeanour of this magnitude so why would KPMG get away with 0.6% of turnover?

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