The Fall of Byju’s and Byju Raveendran

#suprioghatak #byjus #byjuraveendran #corporate governance #mca

The Fall of Byju’s and Byju Raveendran

We have seen that Byju’s and its CEO and founder Byju Raveendran are occupying centre stage for all the wrong reasons. A lot of water has flowed down the drain since the edtech major occupied top drawer ranking globally among its leading competitors. 

Introduction

Established in 2011, Byju’s introduced its learning app in 2015. The edtech company achieved unicorn status (a valuation of $1 B) with 15 M subscribers by 2018, gathering huge attention.

With the Covid-19 pandemic, Byju’s experienced considerable growth as students increasingly accepted online learning as the new normal during lockdowns. However, in 2021, the company incurred a loss of $327 M. Byju’s also witnessed huge layoffs in 2022 and 2023.

During May 2023, Byju’s faced a lawsuit filed by its lenders in a US court. The lenders claimed that Byju’s had missed payments and broken the loan agreement’s clauses, which prohibited material delays in the publication of financial results. The company was also accused by the lenders of misappropriating money through its US-based subsidiary, Alpha. Byju’s, however, refuted these accusations made against it.

On June 22, 2023, Deloitte tendered their resignation as statutory auditors of Byju’s to the Board of Directors, effective immediately. Despite the appointment of BDO as their new auditors, skepticism persists regarding the future of Byju’s.

Inspection of Byju’s ordered by Government amid financial and corporate governance concerns

The inspection of Think & Learn Pvt. Ltd., which operates under the brand Byju’s, will be carried out by the Ministry of Corporate Affairs (MCA).

In the recent past, Byju’s has been battling with multiple negative issues, including most importantly misselling courses, the delay in submitting financial statements, resignation of its statutory auditor in June 2023 and its corporate governance practices.

G. V. Ravishankar of Peak XV Partners (Sequoia Capital India), Russel Dreisenstock of Prosus, and Vivian Wu of Chan Zuckerberg Initiative also resigned from Byju’s board.

Earlier MCA asked the Regional Director at Hyderabad to conduct an inspection of Byju’s, registered in Bengaluru. Further courses of action will be decided after receiving the inspection report.

Think & Learn Pvt. Ltd. was incorporated on 30^th November 2011. The last Annual General Meeting of the company was held on 19^th September 2022.

Byju’s may face a probe as MCA (Ministry of Corporate Affairs) wants to involve SFIO (Serious Fraud Reporting Office) for the resignation of Deloitte and Delayed Financials.

MCA has checked out the legalities and procedures involved in referring the matter to SFIO.

MCA wants to engage SFIO to investigate the resignation of its auditor, Deloitte, and the delayed financial reporting by its parent company, Think & Learn Private Limited.

Deloitte was appointed statutory auditor for a five-year tenure till March 2025 (2024-25). Following the exit of Deloitte, Byju's appointed BDO (MSKA & Associates – a member firm of BDO International in India) as its statutory auditors for the year commencing from 2021-22 for the next five years.

SFIO, a multi-disciplinary organisation under MCA, includes in its hierarchy experts in accountancy, forensic auditing, banking, law, information technology, investigation, company law, capital markets, and taxation domains.

In June 2023, Deloitte Haskins & Sells officially resigned as Byju’s and Aakash Educational Services Limited (Aakash Institute) (AESL) ’s statutory auditors, resulting from the delay in the company filing its 2021-22 financial statements. They were scheduled to be presented to shareholders during an annual general meeting within September 2022.

The government's regulatory response to the compliance failures was influenced by the absence of any mention of non-cooperation by the management, financial irregularities, or fraud in Deloitte's resignation letter to the company's board.

Moreover, Deloitte thanked the management and staff of Think & Learn Private Limited for the cooperation extended to them during their tenure as auditors of the company.

SFIO has to investigate Byju’s affairs in several situations. These include when the Registrar or inspector under section 208 of the Companies Act, 2013 submits a report, when a company passes a special resolution indicating the necessity of an investigation, when it is deemed to be in the public interest, or when a department of the Central Government or a State Government requests an investigation.

This comes a few days after Byju’s proposed the establishment of a Board Advisory Committee (BAC) to guide the CEO, regarding Board composition and the governance structure of the company, during an extraordinary general meeting (EGM).

During the EGM, Byju’s CFO Ajay Goel reiterated the ongoing engagement with newly-appointed auditors BDO for the audit process. The company aims to meet the previously communicated timelines, with the 2021-22 audit targeted for the end of September 2023, and the 2022-23 audit expected to finish by the end of December 2023.

The crisis at Byju’s forces top India VC Firm Blume Ventures to revise strategy

The corporate governance blunders at Byju’s are sending outrage through India’s developing startup economy.

Blume Ventures, a big venture capital firm managing $625 M in assets is becoming more cautious in its investment strategy, alarmed by crises in a homegrown startup and ed-tech leader Byju’s.

It is cutting back on thoughtless investments as it wants portfolio companies to shift focus to profitability, co-founder Karthik Reddy said in an interview. A third of its portfolio, including e-commerce and mobility firms, has turned shaky over the past year.

Byju’s, once India’s most valuable upstart is in turmoil after missing a deadline on financial statements, skipping payments on a $1.2 B loan and losing its auditor and some of its board members.

The chaos at Byju's has forced the entire ecosystem to think about what could be wrong in every portfolio company? Blume Ventures backs Byju’s rival Unacademy, and a number of startups including delivery firm Dunzo and gadget marketplace Cashify. You get these questions from your investors as well.

Byju’s was valued at $22 B in late 2022. In June 2023, one of its main investors, Prosus NV, slashed the value of its stake in a move that pegged Byju’s total valuation at about $5.1 B.

The missteps in governance resulted from a venture capital boom that lasted through 2021. Funding has dried up since as slowing economies, rising interest rates and higher levels of inflation prompted venture investors to pull back.

Indian startups raised $5.4 B in the first half of 2023, a decline of more than 70% from the same period in 2022. Already in 2022, funding dropped to about $27 B from $43 B in 2021.

There is very little early-stage investing happening right now. Blume, based in Mumbai, typically provides seed funding to upstarts.

That cautiousness dovetails with several small startups shutting down amid the funding winter. Investors have become more prudent and firms such as Blume are wary of writing a cheque for just another e-commerce, marketplace or influencer marketing idea.

Fallen Star Byju Raveendran Is No Longer A Billionaire

Three years after he joined the billionaires’ club in 2020, Indian edtech entrepreneur Byju Raveendran is out of that elite ranking for a series of blunders.

Prosus, formerly Naspers, had written down its 9.6% stake in Byju’s to $493 M (as on 31^st March 31, 2023). The write off values Byju’s at $5.1 B, a steep 77% discount to last year’s peak valuation of $22 B.

Consequently, Raveendran’s 18% stake is now valued at under $1 B, but after accounting for the loans he took last year to invest in Byju’s, his personal net worth is estimated at $475 M.

That is a far cry from his net worth of $1.8 B in 2020, when he debuted on Forbes’ World Billionaires list and his firm was valued at $10 B. In two years, his fortune had doubled to $3.6 B — until things began to be destroyed.

Byju’s parent, Think & Learn, founded by Raveendran, a former math tutor, went on a fundraising rampage in 2020-21, raising nearly $4.2 B from a countless number of investors including UBS and Abu Dhabi’s sovereign fund.

It used a major part of that money to fund a buying binge across India, Asia and the U.S. that included the $950 M acquisition of Indian test-prep provider Aakash Educational Services Limited (Aakash Institute) and $600 M for Singapore’s Great Learning, a higher education and professional training firm.

The sheer pace of growth took its toll. Byju’s grew too quickly, without proper checks and balances. Byju’s did not have a CFO (Chief Financial Officer) from December 2021 to April 2023 though it had Vice Presidents of Finance for its different divisions. But still it is yet to file its financial results for the year ended March 31, 2022.

Results were last published in September 2022 for the fiscal year ended March 31, 2021 — after a 12-month delay. Byju’s reported a loss of Rs. 45.6 B ($573 M) — up from Rs. 3.1 B the previous year. Revenue fell 3% to Rs. 24.3 B in the same period.

Raveendran pacified investors by participating in Byju’s funding round in March 2022, investing $400 M at the $22 B valuation. The funding rounds that were announced with much flamboyance did not materialise in funding as investors such as Sumeru Ventures and Vitruvian Partners backed out.

Raveendran said “I’m going all in” during the Forbes Global CEO conference in September 2022.

I've been doing this for 15 years, and the aim is to do this for another 30 years. The world needs 10 more companies like ours. If you do good, you’ll end up doing well.

That did not cut much ice. BlackRock slashed Byju’s valuation to $11.5 B in October 2022 and further to $8.4 B in May 2023. Prosus, a leading investor in edtech globally that had funded Byju’s to the tune of $536 M since 2018, was less generous.

In September 2022, Prosus, which has a dozen edtech investments, including San Francisco-based up-skilling platform Udemy and New York-based social learning community Brainly, marked down the value of its investment in Byju’s to $578M, valuing the firm at $6 B.

Prosus noted in its 2022 annual report that in September 2022, the group lost significant influence in Byju’s over the financial and operating policies of the entity.

Byju’s shook from one crisis to another, the most recent of which was the resignation of its statutory auditor Deloitte in June 2023 over the inordinate delays in preparing financial accounts. Three board members also quit.

Now, Byju’s is in the process of reconstituting the board by bringing in a few independent directors. It is also looking to set up a board of advisors who can guide the founders. At a recent executive board meeting with shareholders Raveendran admitted to making mistakes but asserted that he is focused on course correction.

Byju’s also announced in June 2023 that it is planning an IPO for Aakash Educational Services Limited by mid-2024.

Only time will say what will happen after this. Until then we have to wait.

To be continued

  

KPMG India in a Million Dollar Settlement with PCAOB without any Fallout in India

 #suprioghatak #suchetadalal #kpmg #pcaob #pwc #deloitte #icai #nfra #sebi #ey

KPMG India in a Million Dollar Settlement with PCAOB without any Fallout in India

Inspired by Sucheta Dalal

Introduction - Since I have started writing a couple of decades back the one person who has influenced me the most and still does is Sucheta Dalal. I have written about what KPMG has done in the article PCAOB Sanctions KPMG Firms and Audit Professionals. It has been published on LinkedIn and on Compliance Calendar blog on 12th December.

After that she has written on the same subject. There are some very important things she has touched upon which needs to be emphasised and discussed with our community defined as CAs and CA students.

The PCAOB (The Public Company Accounting Oversight Board) regulates the audits of public companies and SEC-registered brokers and dealers in the US in order to protect investors in the public interest in preparation of informative, accurate, and independent audit reports.

KPMG India settled before the PCAOB on 6 December 2022. But surprise surprise. There is no coverage in India.

PCAOB condemned KPMG Assurance and Consulting Services LLP (KPMG India) and the engagement partner (EP) Sagar P Lakhani for quality control failures, supervisory failures and documentation failures while working with a public company in 2017.

It led to a monetary penalty of $1 M on KPMG India and $75,000 on Mr Lakhani, who has been suspended from associating with a registered public accounting firm for one year and requires KPMG India to undertake and certify the completion of certain improvements to its system of quality control systems.

This is the second time such sanction has happened which relates to an Indian listed entity. The last time was when Satyam Computers collapsed. In May 2011, PCAOB settled an investigation imposing a penalty of $1.5 M plus $6 M by the Securities Exchange Commission (SEC) of the US on five firms of PricewaterhouseCoopers International (PWC) in India. The five PWC entities who participated in the settlement were: Price Waterhouse and Price Waterhouse & Co in Bengaluru, Lovelock & Lewes, Price Waterhouse and Price Waterhouse & Co, Kolkata.

Then, PCAOB’s order correctly said that the reliability of global capital markets depends on auditors fulfilling their obligation to investors to perform robust audits, resulting in well-founded audit reports.

That is why it is surprising that the latest order against KPMG has had no impact in India, and there's nothing in India’s market regulator or audit regulators – The Institute of Chartered Accountants of India (ICAI) or National Financial Reporting Authority (NFRA).

We had expected follow-up on the KPMG India matter. And there are several good reasons for this. First, since it is a settlement, the order does not identify the listed company in which these lapses occurred in 2017. All it says is that the issuer is into wholesale and retail banking and treasury services, headquartered in Mumbai.

The detailed order documents how eAudIT, a proprietary software of KPMG, was misused— they were aware of it but did not stop the misuse. Did the sign-off on blank documents only happen with the bank referred to in the PCAOB order? Was Mr Lakhani the only engagement partner who did this, or was he just unfortunate to be caught?

ICAI, NFRA and the Securities & Exchange Board of India (SEBI) ought to investigate how extensive the practice was and what impact it had on the final audit reports.

Sucheta Dalal emailed KPMG India’s communications department for comments on the PCAOB order. Her article will be updated if they respond. The PCAOB order says that KPMG India has disciplined some personnel and has established and implemented changes to its quality control policies and procedures.

Who Is the Unnamed Bank?

PCAOB’s order details the impact of these lapses on the accounts of the bank, whose identity means a lot to Indian investors and regulators. Since KPMG India and Mr Lakhani are together paying $1,075,000 the lapses are so serious to demand further investigation and Indian investors have the right to know the bitter truth .

The central character is the Mumbai-based private bank with US listing. Sucheta Dalal reached out to some senior people with KPMG links, but they chose to remain silent.

But we are not surprised. Our profession has got away with very relaxed oversight over decades by ICAI. When NFRA chose to act tough we tried to take away the new regulator through the Ministry of Corporate Affairs (MCA) in September 2021.

Let's explore what had happened. In January 2020, when NFRA issued its first set of show-cause notices to auditors of IL&FS Financial Services (IFIN), the two chartered accountants (CAs) rushed to the Delhi High Court with a writ petition, instead of responding to the new regulator. Deloitte Haskins and Sells and BSR & Associates (KPMG India) were the two auditors.

Senior CAs wrote how the profession and industry leaders were upset at NFRA’s action since the firm was superior to most others in the field and suggested that only individual partners should be held responsible and the audit firm let off as debarring a firm causes a lot of disruption.

This view is ironic, as compromise and conspiracy are usually institutionalised as the rewards and incentives of partners are tied to the business generated by them. While partners guilty of professional misconduct who permit the fabrication of accounts must be penalised, sparing the firm will allow large audit firms to make scapegoats out of partners who get caught.

Fortunately, NFRA wasn’t intimidated by the commotion created by the accounting industry. In July 2020, NFRA issued three orders against the engagement partners for IFIN. CA Rukshan Daruvala of Deloitte Haskins and Sells LLP was debarred for five years and slapped a Rs 5 lakh penalty; CA Shrenik Baid was also debarred for five years but was penalised Rs 15 lakh, while CA Udayan Sen, CEO, Deloitte India, was penalised Rs 25 lakh and debarred for seven years.

The findings in all cases were similar—professional misconduct, collusive behaviour in going along with management in agreeing to misstatements/omissions leading to fraud on the users of the financial statements.

NFRA also indicted SRBC & Co, of the Ernst & Young (EY) group for deficiencies in auditing Infrastructure Leasing & Financial Services (IL&FS) for FY 17-18.

All this is good but it is too little, too late. Three other orders were passed since then. Alll in 2022. CA Gulshan Jagdish Jham was debarred for a year and slapped with a penalty of Rs 1 lakh for professional misconduct, failure to report material misstatements, and exercise due diligence in the audit of Prabhu Steel Industries Ltd.

CA Som Prakash Aggarwal (of S Prakash Aggarwal & Co) was debarred for three years and slapped with a penalty of Rs 3 lakh as EP of Vikas WSP Ltd. He was also asked to undertake training on accounting and audit standards and submit proof thereof within 180 days.

CA Rajiv Bengali (of Subramaniam Bengali & Associates) was barred for five years and a penalty of Rs 5 lakh. As EP for Trilogic Digital Media, he was charged with false reporting in the independent auditor's report, failure to comply with auditing standards, etc.

Given the number of forensic audits ordered by SEBI and the falsification of accounts or diversion of funds brought out during the bankruptcy resolution process of corporate defaulters, regulatory action seems too little, too slow.

V Ranganathan, former director and partner at Ernst & Young LLP, says that public banks have written off more than Rs10 T in the last five years and the average recovery has been so poor it is a reflection of the audit at the banks’ and the borrowers’ end.

It is high time the government takes this issue seriously and strengthens the system and makes it robust to monitor the audit firms and create a distinct legal framework for swift and fair trials.

Some favour the US-style settlement process adopted by PCAOB and KPMG India to our slow and agonising process. But we have seen how the settlement provision has been vitiated by arbitrary settlement amounts at SEBI. Often, the penalties are trivial, and there is no information on the wrongdoing or its impact that will help or warn investors.

Last but not the least, there seems to be no shame in ‘settling’ wrongdoing, which defeats its very purpose. Sucheta Dalal's sources told her a whole bunch of ‘consultants’ have set up shop, offering to negotiate quick and low settlements with the regulator.

Even in the KPMG India case, the PCAOB order is not satisfactory as it does not name the bank involved. If PCAOB’s claimed objective is to protect investors and further the public interest in the preparation of informative, accurate, and independent audit reports, the settlement order tells us nothing about whether or not the bank’s audit was compromised and to what extent. How does that protect investors?

Compromised, conniving or negligent auditors are a big worry for any lender or investment professional. Apart from a few good orders from NFRA, some in our profession, especially after the IL&FS debacle, have tried to separate audit and non-audit business. Others are sticking to the claim that there is no conflict of interest.

In Sucheta Dalal's view, it is too early to introduce a ‘settlement’ system in India. It would be far better to strengthen NFRA and give it more teeth and manpower to effect a serious clean-up first.

To be continued

Why Deloitte has not Signed Byju's Financials for 2020-21 Even After 15 Months

 #suprioghatak #byjus #deloitte #revenuerecogntion #accountingstandards 

Deloitte has not signed Byju's financial statements for 2020-21. They have not submitted the financial reports for 2021-22 also.

While Byju's dismissed concerns, if it fails the acid test, it could horrify the entire $3.5 B Indian edtech industry, seasoned investors, upcoming founders included.

What is the problem with Byju’s finances? Are they inaccurate?

Byju’s is late in filing. Next, its books may reveal several discrepancies. Let's have a look.

Accounting issues, troublesome lending arrangements and a constant need for cash are playing simultaneously.  

The reported numbers seem to be distorted for more reasons than one. Bundling hardware like memory cards and tablets in its revenue calculations may have been done to inflate them. They accounted for 63% of its revenue in 2020 with an annual increase of 55%.

Byju’s and its controversial subsidiary WhiteHat Jr draw loans to keep prices affordable and offer a 100% default guarantee to lending partners. This risky practice is disliked.

Byju's says securitization and First Loss Deposit Guarantee (FLDG) are accepted industry practices. If not for FLDG, the majority of consumer parents would not be able to raise personal loans from banks and financial institutions at affordable rates.

Byju’s says that the late filings are not a cause for concern.

Valued at a colossal $22 B, Byju’s has raised over $6 B in its 12-year existence. It has expanded to new countries including the UK, Australia, Brazil, Indonesia, and Mexico. Revenues are not even $1 B. Ideally, the revenue multiples in the edtech space, 19x for larger companies, should be at least $1 B.

It has been on an acquisition splurge since the pandemic, embracing not just e-learning companies but professional skilling and augmented reality start-ups. It is eyeing a public market debut at a massive $48 B valuation soon.

The delay is not a red flag, it said. These numerous acquisitions are being examined thoroughly and the lack of audit bandwidth for the company has scaled up rapidly. Within a few days we can actually see that report.

Byju's made at least 10 acquisitions for a cumulative transaction value of around $2.5 B in 2021.

It has completed the consolidation of businesses and will be filing its pending financial results in June.

This response comes after The Ken reported that Byju's has not filed its financial statements for 2020-21 and 2021-22 as auditor Deloitte is hesitant to put its signature due to problems in refunds, loan guarantees and unusual revenue recognition practices.

Byju's says that they follow the highest standards in all business practices from student success to governance and accounting standards. These practices have been in operation for the last six years, have been audited by Deloitte, and records are submitted to all relevant authorities over these years.

Attributing the delay to a series of acquisitions made by Byju's in 2020 and 2021, they reiterate that multiple acquisitions were made in 2020-21 and each had a different accounting style and year. They have completed the consolidation of businesses and will be filing their financial results this month.

How Byju's records its revenue from sales of hardware (memory cards, tablets etc.) and software (apps and online classes) could have caused a discrepancy in the edtech firm’s financial statements.

Loan guarantees are the second issue highlighted. Byju's offers a 100 percent default guarantee to some lending partners that make loans to its customers. Such guarantees are called First Loss Default Guarantees (FLDG). If the customer fails to repay, Byju’s foots the bill, out of its own books or by raising cash from private investors.

It said that working with lenders that help consumers finance a course lies at the heart of what allows Byju’s to book revenues in advance.

So far, Byju's has raised over $6 B in funding, with the founder Byju Raveendran pumping $400 M in its leading the latest $800 M funding round at a valuation of $22 B in March 2022.

The refund guarantees offered by Byju's and its subsidiaries could create pain points if the actual refunds far exceed the budgeted amount.

Byju's is looking to go for an IPO in the US through the SPAC route. Hence, Deloitte could be taking a cautious stand.

Now the Indian edtech space is reeling under the bad weather of the funding winter, causing at least two start-ups to shut operations - Udayy and Lido Learning.

Edtech unicorns Vedantu and Unacademy have laid off over 600 employees each. At least 800 employees have resigned at Byju's owned White Hat Jr. The total edtech layoffs have crossed 3,500 over the last two months.

Conclusion

With these practices, Byju Ravindran's own standing as a founder is at stake as recently founders like Ankiti Bose and Ashneer Grover were shown the door for false revenue reporting and accounting.

A few million dollar questions remain to be answered

Why has Deloitte signed the previous financial statements and held off this time?

Why have the investors been investing so much money in a start-up like Byju's?

Please read Part-2 and Part-3 

About Author

CA Suprio Ghatak

Qualification: The Institute Of Chartered Accountants Of India

Company: J K V S & CO, Chartered Accountants

Location: Kolkata

About Author :

I am a Partner at J K V S & CO. I look after Recruitment, Training and Development. I am working here since May 2017.I also look into all ICAI related matters of the firm.

PwC UK ordered to pay fine of £ 5M over audits of London-listed construction groups

#pwc #pwcuk #frc #penalties #auditfailure #regulatoryaction #bigfour

PwC UK ordered to pay fine of £ 5M over audits of London-listed construction groups

Financial Reporting Council (FRC), the UK regulator has ordered penalties to be paid by PwC UK for their failures on accounts of Kier and Galliford Try. PwC’s work was not of the required standard.

PwC UK has been fined twice in a day by Financial Reporting Council (FRC) over audit failures of the two London-listed construction groups.

It was ordered to pay £5 M after Financial Reporting Council (FRC) found problems in both the audits. The companies have been hit by accounting errors in the recent past.

Financial Reporting Council (FRC) found severe problems with PwC’s audit of long-term contracts in these two companies, including recognition of revenue and costs on large contracts at Galliford Try.

The fines are the latest regulatory action over audits in the construction and outsourcing sectors, where accounting treatment of multiyear contracts and validity of assumptions made by company management in preparing the accounts are key issues.

Meticulous audit of long-term contract accounting is very important in construction companies, where many contracts are spread over a number of years. That’s what Claudia Mortimore, Financial Reporting Council (FRC) deputy executive council said.

Auditors must ensure they obtain sufficient appropriate audit evidence to support accounting of the contracts as well as apply sufficient professional scepticism. This is indispensable to allow investors to have confidence in the financial statements.

PwC UK was ordered to pay £ 3M for failing to meet the regulatory requirements in its audit of Galliford Try’s accounts for 2018 and 2019. The penalty was reduced from £ 5.5M in recognition of its co-operation. 

Financial Reporting Council (FRC) said PwC had not done enough to challenge declarations made by Galliford Try’s management, which was found in 2020 to have overstated its assets by £ 94.3M.

A further penalty of almost £ 2M was ordered, reduced from £ 3.35M, for its audit of Kier’s accounts for the year ended June 2017, when it failed to find errors in the company’s income and cash flow statements.

In both the companies - Galliford Try and Kier, PwC had not shown suitable professional scepticism and failed to gather sufficient audit evidence in its audits.

PwC UK agreed to pay more than £ 756,000 to cover the cost of the two FRC investigations.

Jonathan Hook, the partner who led the audits of both companies, was given two fines totalling more than £ 135,000. He retired from PwC UK in 2021. Both Hook and PwC UK were given severe admonishment by FRC.

PwC UK  had invested a lot in improving audit quality, including long-term contracts, since the audits of Kier and Galliford Try.

Financial Reporting Council (FRC) instructed PwC UK to review its audits of listed companies, where long-term contracts are widespread and to report to FRC on the results. PwC received the best score out of the Big Four accounting firms in FRC’s most recent quality inspections.

Financial Reporting Council (FRC) investigations into PwC UK’s audits of Kier and Galliford Try are the latest regulatory actions against auditors of UK-listed contractors.

Deloitte was ordered in April 2022 to pay a fine and costs of more than £ 2M for audit failures at Mitie, while Grant Thornton LLP (US) was fined £ 700,000 in November 2021 for problems with its review of the accounts of Interserve, which became insolvent in 2019 and entered the legal process.

Financial Reporting Council (FRC) is also investigating KPMG UK for signing off the accounts of outsourcer Carillion before it went into liquidation, and mid-tier (read medium sized) firm BDO UK LLP over its auditing of NMCN, a London-listed construction company that went into liquidation in October 2021.

Financial Reporting Council (FRC) in January 2022 was probing PwC’s work at defence contractor Babcock, which has also disclosed accounting errors in recent years.

Financial Reporting Council (FRC) is also reviewing PwC UK's audits in other sectors, with investigations under way into its audits of BT, Eddie Stobart Logistics, collapsed minibond company London Capital and Finance and Wyelands Bank, owned by steel tycoon Sanjeev Gupta. 

To be continued

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

#kpmg #frc #rollsroyce #bigfour #noncompliance #criminalinvestigation 

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