KPMG is set to be hit with the UK’s biggest ever fine after a court found its auditors deliberately misled regulators during routine inspections of their work.
The court heard on Thursday that KPMG and the Financial Reporting Committee had agreed that the company was fined £20 million for its misconduct, but that the fine should be reduced to £14.4 million to reflect mitigating factors and KPMG’s admission of wrongdoing. KPMG also agreed to pay £4.3 million in fees.
Five individual defendants – Peter Meehan, who oversaw the audit of collapsed government contractor Carillion; senior managers Alistair Wright, Richard Kitchen and Adam Bennett; and junior auditor Pratik Paw, were found guilty of wrongdoing.
Another former KPMG auditor, Stuart Smith, received a £150,000 fine and a three-year professional ban as part of a settlement with the FRC in January.
The court’s findings on Thursday followed five weeks of hearings in January and February and focused on KPMG staff’s routine FRC inspection of the firm’s 2014 accounts of outsourcers Regenesis and Carillion’s 2016 accounts. Behavior during the audit.
It ruled that during the inspection, KPMG auditors created documents, including meeting minutes, spreadsheets and goodwill assessments, but had produced them before the accounts were signed.
Summing up the court’s findings, the FRC’s Mark Ellison QC said Meehan, Wright, Kitchen and Bennett “acted willfully and dishonestly in making false documents and making false statements to the FRC”. The court found that Paw acted without integrity, but not dishonest.
The FRC asked Meehan to be fined £400,000 and banned from the trade for 15 years. Meehan’s lawyer said he should be fined £250,000 and banned for 10 years.
The watchdog said Wright, Kitchen and Bennett should each be fined £100,000 and banned for 12 years, with a 10 per cent discount given to Wright for admitting some of the charges against him. The FRC said Paw, who was not a qualified accountant at the time of his misconduct, should have been fined £50,000 and banned for four years.
Wright’s David Turner QC says his client is ‘punished, humbled’ [and] repentance”, but the fine against him should not exceed £50,000.
The kitchen’s Fionn Pilbrow QC said his client should be banned for no more than six years and any fines should take into account mitigating factors, including the “serious career consequences” of the court’s findings on him.
Lawyers for Bennett and Paw will present their arguments in court on Friday. The court will decide the final penalty after hearing arguments from lawyers on both sides.
KPMG’s £14.4m fine would be the second-largest ever for a UK accountancy firm, dwarfed only by Deloitte’s £15m fine in 2020 over a failed audit of former FTSE 100 software group Autonomy.
KPMG, which took responsibility for the actions of its employees, admitted at the start of the court that the FRC had been misled.
Jon Holt, chief executive of KPMG UK, said the misconduct was “unreasonable and wrong”. He was right that the company and its former auditor should face “serious regulatory sanctions”.
He added: “We have been working hard and being fully transparent with our regulators to ensure this matter is not representative of our company’s wider culture or practices.”
The tribunal was not asked to assess whether KPMG’s audit of Carillion or Regenesis was materially flawed, other than whether its auditors had misled the FRC during a routine regulatory review of their work.
The FRC is conducting a separate investigation into possible failures in the Carillion audit. KPMG, which has been fined more than £34 million for misconduct in the UK over the past four years, said it would defend a £1.3 billion negligence claim against it by Carillion liquidators. The government has also launched legal action to try to ban eight of Carillion’s former directors from the UK board.
Carillion had £7bn in debt and just £29m in cash when it collapsed more than four years ago after receiving a clean audit opinion. The incident adds to the urgency of long-standing calls for reforms to the UK’s audit sector and board oversight.