Sanctions against KPMG and others in connection with Regenersis & Carillion audits
News types: Investigations, Tribunals
Published: 25 July 2022
This notice concerns the findings of an independent Disciplinary Tribunal following an investigation under the Financial Reporting Council’s Accountancy Scheme. The Disciplinary Tribunal’s findings relate only to those persons and entities who, as Members or Member Firms of the Accountancy Scheme, were the subjects of the proceedings and it would not be fair to treat any part of this document as constituting or evidencing findings against any other persons or entities.
The Financial Reporting Council (FRC) today announces sanctions against KPMG LLP (KPMG), a former KPMG partner and four former KPMG employees, following an investigation undertaken pursuant to the Accountancy Scheme. The investigation related to the provision of false and misleading information and documents to the FRC in connection with the FRC’s Audit Quality Reviews of two audits carried out by KPMG: the audit of the financial statements of Regenersis plc for the period ended 30 June 2014 (“the Regenersis audit”); and the audit of the financial statements of Carillion plc for the period ended 31 December 2016 (“the Carillion audit”).
An independent Disciplinary Tribunal made findings of Misconduct following a five-week hearing during January and February 2022 and sanctions were determined following a hearing in May 2022.
KPMG admitted its liability for the acts of all the individuals and that those acts amounted to Misconduct.
Sanctions
KPMG has been:
The Financial Reporting Council (FRC) today announces sanctions against KPMG LLP (KPMG), a former KPMG partner and four former KPMG employees, following an investigation undertaken pursuant to the Accountancy Scheme. The investigation related to the provision of false and misleading information and documents to the FRC in connection with the FRC’s Audit Quality Reviews of two audits carried out by KPMG: the audit of the financial statements of Regenersis plc for the period ended 30 June 2014 (“the Regenersis audit”); and the audit of the financial statements of Carillion plc for the period ended 31 December 2016 (“the Carillion audit”).
An independent Disciplinary Tribunal made findings of Misconduct following a five-week hearing during January and February 2022 and sanctions were determined following a hearing in May 2022.
KPMG admitted its liability for the acts of all the individuals and that those acts amounted to Misconduct.
Sanctions
KPMG has been:
- fined £20 million, reduced to £14.4 million to reflect KPMG’s self-reporting, co-operation, and admissions;
- severely reprimanded; and
- ordered to appoint an independent reviewer to conduct a review to consider the effectiveness of KPMG’s current AQR policies and procedures in supporting high quality engagement with the AQR inspectors.
Mr Meehan has been excluded from membership of the ICAEW for a period of 10 years, and fined £250,000.
Mr Wright has been excluded from membership of the ICAEW for a period of 8 years, and fined £45,000.
Mr Bennett has been excluded from membership of the ICAEW for a period of 8 years and fined £40,000.
Mr Kitchen has been excluded from membership of the ICAEW for a period of 7 years, and fined £30,000.
Mr Paw was severely reprimanded.
Costs
KPMG agreed to pay £3.95 million towards Executive Counsel’s costs of the investigation together with the costs of the Tribunal.
Findings of Misconduct
The allegations in the Formal Complaint related to the FRC inspections (known as Audit Quality Reviews, or AQRs) of the Carillion and Regenersis audits. The allegations concerned the provision of false and misleading documents and information to the AQR teams. The Formal Complaint did not allege Misconduct arising from the performance of the relevant audits, nor did it allege that in either case the financial statements had not been properly prepared.
The Tribunal made a number of findings of Misconduct, involving breaches of the fundamental principle of Integrity which requires an accountant to be straightforward and honest in all professional and business relationships stating:
No accountant should require any education or training to realise that deliberately misleading anyone, but especially a regulator, is at least incompatible with integrity and, barring special circumstances, dishonest.
In commenting on the importance of the AQR process and the seriousness of the Misconduct in its report the Tribunal stated:
“The seriousness of the Misconduct that we have found proved scarcely needs explanation. Effective audits are essential to the financial system. Management and investors should be able to rely on the audited financial reports of the company in question. The purpose of AQRs is to assess, and where appropriate suggest improvements to, the effectiveness of audits.
The effectiveness of the regulation of auditors and audits depends on the accurate disclosure to the AQR Team of the audit work carried out by the auditor. Misleading the AQR undermines the effectiveness of its work; indeed, it may deprive the AQR of any useful result”.
Regenersis AQR inspection
The Tribunal found that there had been Misconduct in respect of the Regenersis AQR inspection, in that Mr Wright and Mr Bennett had:
- created or had a role in creating a false or misleading audit working paper on goodwill (“the Goodwill Paper”),
- made or had a role in the making of false or misleading representations to the AQR inspectors as to when and in what circumstances the Goodwill Paper was created,
- made false representations in the Goodwill Paper that certain audit work had been performed during the Regenersis audit.
And that in each case they were party to the deliberate misleading of the FRC’s AQR inspectors, and that their conduct was dishonest.
Carillion AQR inspection
The Tribunal found that there had been Misconduct in respect of the Carillion AQR inspection concerning minutes of year-end ‘clearance’ meetings, and an audit working paper on the selection of contracts for audit testing (the CCS Paper), that were presented to the AQR inspectors as having been created during the Carillion audit.
In respect of the meeting minutes the Tribunal found that Misconduct had been committed by Mr Meehan, Mr Wright, Mr Kitchen, Mr Bennett, and Mr Paw in that:
Carillion AQR inspection
The Tribunal found that there had been Misconduct in respect of the Carillion AQR inspection concerning minutes of year-end ‘clearance’ meetings, and an audit working paper on the selection of contracts for audit testing (the CCS Paper), that were presented to the AQR inspectors as having been created during the Carillion audit.
In respect of the meeting minutes the Tribunal found that Misconduct had been committed by Mr Meehan, Mr Wright, Mr Kitchen, Mr Bennett, and Mr Paw in that:
- Mr Wright and Mr Paw had created, and Mr Meehan, Mr Kitchen and Mr Bennett had assisted or encouraged the creation of, false or misleading meeting minutes, intending to mislead, or as a party to the deliberate misleading of, the AQR inspectors or being reckless as to whether they would be misled; and
- They had made, or connived in or were knowingly associated with making, certain false or misleading representations to the AQR inspectors as to when and in what circumstances the meeting minutes were created, intending to mislead, or as a party to the deliberate misleading of, them or being reckless as to whether they would be misled.
And that Mr Meehan, Mr Wright, Mr Kitchen, Mr Bennett were party to the dishonest misleading of the AQR inspectors. Mr Wright had already admitted these allegations, and that his conduct was dishonest.
The Tribunal found that Mr Paw, by implementing without question the instructions given to him by Mr Wright to create false minutes, acted without the integrity required of an accountant and became a party to the deliberate misleading of the AQR. However, Mr Paw was not found to have acted dishonestly.
A further allegation of Misconduct in relation to the content of the meeting minutes made by Executive Counsel against Mr Meehan, Mr Wright and Mr Kitchen was found not proved by the Tribunal.
In respect of the CCS Paper the Tribunal found that Misconduct had been committed by Mr Meehan, Mr Kitchen and Mr Bennett in that:
- Mr Kitchen had created, and Mr Meehan and Mr Bennett had assisted or encouraged the creation of a false or misleading audit working paper on the selection of construction contracts;
- They had made, or had connived in or were knowingly associated with making, false or misleading representations as to when and in what circumstances the audit working paper was created.
The Tribunal also found, in respect of Mr Kitchen alone, that he had made false representations in the CCS Paper that certain audit work had been performed during the Carillion audit and that his conduct was dishonest.
KPMG admitted its liability for the acts of all the individuals set out above and that those acts amounted to Misconduct.
In addition to KPMG’s admissions of liability and Misconduct, the Tribunal also identified as important mitigating factors:
KPMG admitted its liability for the acts of all the individuals set out above and that those acts amounted to Misconduct.
In addition to KPMG’s admissions of liability and Misconduct, the Tribunal also identified as important mitigating factors:
“KPMG’s conduct in bringing the Misconduct to the attention of the FRC, its co-operation with the FRC’s inquiry, and the action it has taken to address the possibility, hopefully remote, of recurrence.”
Elizabeth Barrett, Executive Counsel said:
“Misconduct that deliberately undermines the FRC’s ability to monitor and inspect the effectiveness of audits is extremely serious because it obstructs the FRC’s ability to protect the public interest. This case underlines the need for all professional accountants, regardless of seniority, to be aware of their individual responsibility to act honestly and with integrity in all areas of their work.”
The Report of the Tribunal is not published at this time.
[1] The Fundamental Principle of Integrity is one of five Fundamental Principles contained in the ICAEW Code of Ethics. The Code provides:
A professional accountant shall comply with the principle of integrity, which requires an accountant to be straightforward and honest in all professional and business relationships.
…
A professional accountant shall not knowingly be associated with reports, returns, communications or other information where the accountant believes that the information:
(a) Contains a materially false or misleading statement;
(b) Contains statements or information provided recklessly; or
(c) Omits or obscures required information where such omission or obscurity would be misleading.