KPMG fined £3.4M over Big Failures in the 2010 Rolls-Royce audit in UK

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KPMG fined £3.4M over Big Failures in the 2010 Rolls-Royce audit in UK 

The Financial Reporting Council (FRC), independent regulator in the UK and Ireland, responsible for regulating auditors, accountants and actuaries, and setting the UK's Corporate Governance and Stewardship Codes, says KPMG’s audit of Rolls-Royce PLC, major British manufacturer of aircraft engines, marine propulsion systems, and power-generation systems, failed to report payments to Indian intermediaries. 

KPMG will pay a fine of £3.4M to FRC after accepting failures in its audit of Rolls-Royce, Britain’s most prominent aerospace and defence manufacturer, that paid a £500M settlement after bribery allegations. 

KPMG received a severe rap over the knuckles from FRC, and will have to assign an independent review into the efficacy of its policies.

KPMG has been fined £3.4M by FRC for serious failures in its audit of Rolls-Royce’s 2010 accounts, five years after the engine-maker reached a settlement with authorities over corruption allegations. 

It is the fourth significant fine KPMG has paid this year.

Anthony Sykes, the KPMG partner who led the audit, will also pay a £112,500 fine and received a severe rap over his knuckles ahead of his retirement from KPMG in September. The fines for KPMG and Sykes were reduced from £4.5M and £150,000 respectively as they cooperated with FRC. KPMG will also pay FRC’s costs for the investigation.

The series of scandals of the Big Four continue and this is the latest. All have been fined millions of pounds for audits that had significant inadequacies.

Poor quality audits have been blamed from collapsed construction firm Carillion – for which KPMG was this month fined £14M – to retailer BHS, for which PwC was fined £6.5M. KPMG has also been fined this year in the alcohol distributor Conviviality and Revolution Bars.

Rolls-Royce agreed to pay £671M in penalties in 2017 after prolonged investigations into bribes it paid for export contracts, including £500M in UK and other payments in US and Brazil. The charges in the deferred prosecution agreement included false accounting and conspiracy to corrupt.

FRC says, bribery and malpractice through intermediaries and advisers in the defence field were prominent at the time of audit, and KPMG should have known it as it was auditing another defence company which paid a large fine to settle a criminal investigation.

FRC said KPMG had failed to deal properly with Rolls-Royce which was not complying with legal requirements in relation to payments of agents in India.

The serious failures highlighted by the FRC related to two payments – £3.3M and £1.9M – made to Indian intermediaries.

KPMG was aware in July 2010, but did not include them in the audit report. Sykes also instructed a manager to remove a paragraph referring to them from minutes.

FRC says that KPMG failed to exercise professional scepticism and did not obtain sufficient audit evidence and document this on the Rolls-Royce audit file. Its quality control was substandard.

Claudia Mortimore, the deputy executive counsel to the FRC, highlighted the need for accountants to question their clients’ assertions. 

“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,” she said. “This is particularly so when the audited entity is in a sector where such risks are known to be prevalent.”

To be continued