KPMG Fined Over Audit as U.K. Ramps Up Industry Investigations

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By Michael Kapoor

The U.K.'s accounting regulator fined KPMG LLP 3.15 million pounds ($4.2 million) for weaknesses in its audit of a technology company, Quindell Plc, as questions mount over both auditing standards in the U.K. and the efficacy of the watchdog itself.

The Financial Reporting Council said KPMG has “admitted that their conduct fell significantly short of the standards reasonably to be expected” in two areas of the audit: revenue recognition for legal services and the sale and purchase of software licenses.

The firm was reprimanded and originally fined $6 million, which was reduced to $4.2 million when it agreed to settle the case. William Smith, KPMG’s audit engagement partner for Quindell (since rebranded Watchstone Group Plc) will pay a $112,000 fine, reduced from the original $160,000.

Audit Failures

A KPMG spokesman said in a statement: “We regret that some aspects of our audit for the year ended 31 December 2013 did not meet the required standards.”

“As we stated in our audit opinion for the following year, certain information given to KPMG contradicted representations previously made by former members of management. Nonetheless, we accept the FRC’s findings that in two specific areas of the audit, our challenge for the year ended 31 December 2013 should have gone further,” the spokesman said.

KPMG is also being investigated by the FRC for its audit of Carillion Plc, a construction and outsourcing group that collapsed in January. The FRC is expected to soon announce the results of its investigation of another Big Four firm, PricewaterhouseCoopers LLC, over its audit of BHS Ltd., a retailer that went into bankruptcy in 2016.

BHS had been sold the year before its collapse for 1 pound after publishing unqualified accounts for the year to Aug. 30, 2014.

Regulator Under Review

The series of audit failures has led to political calls for investigations into auditing standards in the country, and the dominance of the Big Four accounting firms—Ernst & Young LLP, Deloitte LLP, KPMG, and PwC.

A parliamentary report into the collapse of Carillion also called the FRC “toothless” and “useless” and in April the government launched an independent review of the watchdog.

The government’s business department June 6 set out the scope of the review and called for evidence, saying that the FRC’s role and purpose, effectiveness, legal status, governance and leadership would be examined.

Closed or Merged?

The review could lead to the FRC being closed or merged into the Financial Conduct Authority, which regulates U.K. financial services companies.

When the FRC announced the review in April, it said it would double the maximum fine that it could impose on Big Four firms for poor audit work to $13.3 million.

Its largest fine to date was the $6.8 million penalty imposed on PwC in August 2017 for its audit of RSM Tenon Plc, a professional services firm that went into insolvent administration in 2013.

To contact the reporter on this story: Michael Kapoor in London at mkapoor@correspondent.bloomberglaw.com

To contact the editor responsible for this story: S. Ali Sartipzadeh at asartipzadeh@bloombergtax.com

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