U.K. Watchdog Opens Inquiries into Major Accounting Firms

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June 9 — The U.K. Financial Reporting Council has launched investigations into two leading financial services companies in the U.K.

FRC, which sets and enforces accounting, auditing and actuarial standards in the U.K. and Ireland, said June 8 that it would examine Deloitte LLP's work in preparing, approving and auditing of the financial statements of companies within Serco Group plc for the financial years ended December 31, 2011 and December 31, 2012.

U.K-based Serco Group, is an international outsourcing company that runs transportation, aviation and criminal justice systems.

Investigation Into KPMG Audit

The probe comes on the heels of a June 6 FRC statement that it would look into the ethical aspects of non-audit services that KPMG Audit plc provided. The services took place during its audit of the financial statements of U.K. clothing retailer Ted Baker plc and an affiliate for the periods ended January 26, 2013 and January 25, 2014.

No Ted Baker plc employees are being investigated, the council noted.

Full Cooperation

The Ted Baker group reported 456.2 million pounds ($660 million) in revenues for the year ended Jan. 30, 2016, a 17.7 per cent increase from the previous year.

Both Deloitte LLP and KPMG Audit told Bloomberg BNA in June 9 e-mail responses to questions that they would cooperate fully with the FRC investigations.

Information From Serious Fraud Office

FRC began the inquiry into Deloitte LLP in response to information the council received from the U.K. Serious Fraud Office. This office is an independent U.K. government agency that is conducting a separate criminal investigation, begun in 2013, into electronic monitoring contracts that Serco and a competitor, G4S, provided in England and Wales.

Serco reported revenues of 3.17 billion pounds for 2015, down from 3.95 million pounds in 2014.

“Deloitte is committed to upholding the highest professional standards,” Deloitte LLP said in its e-mail, and “we take this investigation seriously.”

‘Exercising Professional Judgment.'

KPMG Audit said in its e-mail that it has always worked to ensure that the non-audit services it provides to audit clients meet both the letter and the spirit of regulatory requirements.

“However, we recognise that the application of principles requires the exercise of professional judgment and, in this instance, the FRC's view may differ from our own,” KPMG Audit said.

Audit Quality Review

An FRC audit quality review, published in May 2016, of KPMG LLP and KPMG Audit that covered February 2015 to January 2016 called on KPMG to undertake an in-depth review of its consultation and approval processes for providing non-audit services.

“In particular, it should consider the appropriateness of such services in light of the changes to Ethical Standards which take effect in June 2016,” the review said.

Evaluating Company Approach

In response, KPMG said that it's currently assessing its approach to consultations by professional staff in providing non-audit services.

This assessment includes considering:

  •  who is consulted on non-audit services;
  •  how consultations should be documented; and
  •  how its management system RiskConnect, introduced in April 2015, might facilitate consultations.

 

Ongoing Investigations

FRC currently is investigating KPMG Audit's role in reporting on the Bank of New York Mellon's compliance with U.K. client asset rules (11 APPR 624, 7/3/15).

The Financial Conduct Authority, a U.K. enforcement agency, fined BNY Mellon affiliates 126 million pounds in April 2015 for failing to comply with the FCA's custody rules on client assets.

In addition, FRC started a preliminary inquiry in January 2016 into the KPMG affiliate's audit of Halifax Bank of Scotland, which collapsed in October 2008 (12 APPR 07, 4/8/16)(

FRC didn't indicate a timetable for completing the Deloitte LLP and KPMG Audit investigations, which will be carried out by its executive counsel and its enforcement division.

By David R. Jones

To contact the reporter on this story: David R. Jones in London at correspondents@bna.com

To contact the editor responsible for this story: Laura Tieger Salisbury in Washington at lsalisbury@bna.com

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