In this article, first published by Accountancy Age, our regulatory and professional discipline partner, Andrew Pavlovic, shares insights on KPMG’s tribunal hearing, shedding light on the regulatory implications for the firm and individuals involved.
On January 10, 2022, a tribunal hearing commenced to determine the Financial Reporting Council’s (FRC) allegations against KPMG and six of its former auditors. In this article, Andrew Pavlovic, regulatory and professional discipline partner at CM Murray LLP, comments on what is known about the case so far, and the regulatory implications for both the firm and the individual respondents going forwards.
The hearing relates to audit quality review inspections carried out by the FRC into KPMG audits of Carillion in 2016, and Regenersis in 2014. In both instances, the FRC allege KPMG’s auditors acted dishonestly and/or with a lack of integrity in creating documents, which gave the regulator the impression more work had been done on the audits than was the case.
The six auditors under scrutiny are of varying experience. Peter Meeham is one of the most high profile; he was the lead partner of the Carillion audit. But several more junior members of the profession, the youngest of whom is 25, are alleged to have been instructed to create backdated documents then provided to the inspectors.
KPMG already conceded in a statement that misconduct occurred, and the regulator had been misled. However, the Big Four firm emphasised the conduct had been self-reported and that such conduct was not systemic or representative of the firm’s conduct more generally.
Several adverse decisions have been made by the regulator against KPMG in recent years, and as such the firm would have been keen to avoid further scrutiny, and media focus, on a lengthy and contested hearing.
Indeed, after this hearing had commenced, the FRC published a Final Decision Notice on January 18, recording KPMG’s agreement to be fined £3.01m for misconduct in respect of their audits of beverage company owner and distributor, Conviviality in 2017. Nicola Quayle, the partner in charge of the audit, was fined £80,050. The Final Decision Notice says the FRC considered both KPMG and Quayle’s previous regulatory history when determining the levels of the fines, referring to KPMG’S “poor regulatory track record”.
At the outset of the Carillion/Regenersis hearing, it was announced the FRC had entered into a settlement agreement with one of the respondents, Stuart Smith, the partner in charge of the Regenersis audit. In the agreement, Smith admits he acted with a lack of integrity and was reckless – but not dishonest – when making representations to FRC inspectors regarding the audit.
The FRC has suspended Smith for three years and fined him £150,000. The agreement records Smith’s admission had been considered when deciding the period of exclusion but had been made too late to reduce the size of the fine. The agreement also notes KPMG will pay the FRC’s legal costs.
So far, media reporting of the hearing suggests various defences are being deployed; Meehan argues he was not aware of any attempt to mislead the regulator, and that he had placed trust and confidence in the more junior members of his team.
More junior respondents’ cases, on the other hand, appear to demonstrate they were instructed to create documents by more senior individuals but that they had no dishonest intent. Clearly, the respondents will be seeking to avoid any findings of dishonesty, given the likely career-ending consequences such a finding would have.
It will be interesting to see the approach taken by the FRC to the more junior respondents, with KPMG’s expressing “regret” individuals involved in the case failed to act properly or to call out the inappropriate behaviour of others. The firm also expressed “sadness” that relatively junior members of staff were facing very serious regulatory sanctions at such an early point in their careers.
The level of the fine issued to KPMG will also be of interest to many, given the comments in the recent Final Decision Notice about their previous regulatory track record. It is important to note however that this hearing is focused on the narrow issue of the information provided to the FRC during the relevant inspections, and not the quality of the audits themselves.
The Carillion audit is the subject of a separate investigation, following the high-profile collapse of the firm and all the associated fallout in 2018.
This article was first published by Accountancy Age on 28 January 2022.
If you have any questions arising from this alert, or for any other regulatory queries, please contact our Partner, Andrew Pavlovic, who specialises in regulatory and professional discipline issues for law firms and partners, high-net-worth individuals, companies, charities and regulators.
Andrew Pavlovic is recognised by Legal 500 UK 2021 & 2022 as a ‘Rising Star’ in the field of professional discipline, and has substantial regulatory experience, having previously acted for the Solicitors Regulation Authority over several years in complex disciplinary proceedings and subsequent appeals.
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