While I was vacationing in South Carolina last week, word officially came down from across the pond about the highly anticipated fine KPMG U.K. would be receiving from a Financial Reporting Council disciplinary tribunal for bungling reports on Bank of New York Mellon Corp.
The tribunal let KPMG off the hook, deciding on a fine of £5.05 million ($6.1 million) for failings related to compliance reports the firm created and submitted on behalf of BNY Mellon entities, according to the Wall Street Journal. That fine is significantly less than the £12.5 million fine the FRC thought KPMG deserved.
KPMG will pay only £3.5 million ($4.3 million) of that fine, according to the FRC, because the firm admitted to dropping the ball on making sure BNY Mellon complied with rules on keeping client assets safe.
In addition, KPMG partner Richard Hinton, who as a director signed the 2011 client assets reports on behalf of KPMG, was fined £75,000 by the FRC, but he’ll only have to pay £52,500 because he admitted to misconduct.
So in 2019, KPMG U.K. has so far been fined £16.05 million ($19.5 million) by the FRC, reduced to £13.5 million ($16.4 million), for various audit failures and misconduct. OK, so it’s not the $50 million in fines KPMG in the U.S. was given in one fell swoop by the SEC in June over the whole PCAOB cheating fiasco and for auditors gaming internal training exams at the firm, but it’s still the most any one audit firm in the U.K. has been fined this year.
And get this: The FRC said last week that it issued a record £42.9 million in fines to audit firms in 2018-19. Excluding the most recent punishment over the BNY Mellon reports but including two fines earlier this year plus fines last year for the crappy auditing of Quindell PLC and Ted Baker PLC, KPMG was docked £18.5 million—that’s 43% of all the fines the FRC shelled out in 2018-19.
No wonder the House of Klynveld’s risk management, controls, and the behavior of its partners and other employees in the audit practice are under review by the FRC.
So let’s take a look back at what’s gone wrong at everyone’s favorite four-letter Big 4 firm this year:
BNY Mellon reports: £5.05 million fine (reduced to £3.5 million)
Last September, KPMG and Hinton admitted to misconduct after an FRC investigation into 2011 reports on client assets held by BNY Mellon and its London branch.
The reports were submitted to the Financial Services Authority, a former regulator for the financial services industry that was replaced by the Financial Conduct Authority and the Prudential Regulation Authority in 2013, according to the Wall Street Journal.
The regulation at the center of the KPMG case, the client assets sourcebook, or CASS, involved BNY Mellon’s role as a custodian of client assets valued at their peak at more than £1 trillion. KPMG’s work didn’t meet certain regulatory standards, the FRC said.
“The misconduct consisted of a failure to understand and to apply fundamental rules of CASS,” an FRC tribunal said in a statement. KPMG didn’t ensure appropriate training, support and supervision of the 2011 audits of the bank’s client assets sourcebook, according to the regulator.
In addition to the fines to the firm and to Hinton, the FRC said last week that KPMG must conduct a quality performance review of each employee who signs a client assets report and to provide details about the outcome of the reviews. The review process will last for three years.
Lloyd’s Syndicate 218 audit: £6 million fine
KPMG kept out of trouble for the first three months of 2019, but at the end of April, the FRC found misconduct in relation to the audit of financial statements of a Lloyd’s of London insurance syndicate.
The FRC’s investigation focused on KPMG U.K.’s audits of the 2007, 2008, and 2009 financial statements of Syndicate 218, which is also known as Equity Red Star Insurance, WSJ reported.
Syndicate 218 had been losing lots of money for several years due to a large number of personal injury claims. KPMG partners Mark Taylor and Anthony Hulse were given the task of reviewing Syndicate 218’s accounts, which they screwed up mightily:
KPMG, Mr. Taylor and Mr. Hulse made insufficient inquiries into Syndicate 218’s processes to review insurance claims, and didn’t take action when reserves used to cover these claims declined, according to the FRC.
Taylor was fined £100,000 and will be required to have a second partner review his audits until the end of 2020. He also received a severe reprimand from the FRC.
Hulse, who no longer works for KPMG, received a fine of £100,000 and a severe reprimand. KPMG also agreed to conduct an internal review and to report to the FRC on aspects of its 2018 insurance audits.
Co-operative Bank audit: £5 million fine (reduced to £4 million)
The following week, KPMG was fined again, this time for its failings in connection with the audit of financial statements of Co-operative Bank for 2009, the year the lender merged with Britannia Building Society.
According to WSJ:
The FRC said KPMG and its audit partner Andrew Walker admitted that their conduct fell short in two areas: the audit of fair-value adjustments of loans in the commercial loan book acquired from Britannia, and the audit of a series of securities acquired from Britannia called leek notes.
KPMG and Mr. Walker failed to obtain “sufficient appropriate audit evidence” and to exercise “sufficient professional skepticism,” the FRC said. They also failed to inform Co-op Bank about inadequacies in disclosures relating to the leek notes.
Walker was fined £125,000 (discounted for settlement to £100,000) and severely reprimanded. In addition, all of KPMG’s engagements with credit institutions for audits with 2019, 2020, and 2021 year-ends will be subjected to an additional review by a separate KPMG audit quality team, who will provide reports to the FRC.
There’s just under five months left in 2019, and there will undoubtedly be more fines for KPMG U.K. So get your popcorn ready.