KPMG reprimanded as Big Four break-up talk grows

08 May 2019 Consultancy.uk

Big Four firm KPMG has been stung with a seven-figure fine by the UK’s accounting watchdog, following a lengthy probe into its audits of Syndicate 218. It is the latest in a succession of public reprimands for the auditing scene’s biggest players, which have been under intense scrutiny since the collapse of Carillion in 2018.

The UK wing of international professional services giant KPMG has been hit with a £6 million fine, and "severely reprimanded", following an examination by the Financial Reporting Council (FRC) of its 2008 and 2009 audits of Syndicate 218. The FRC found that KPMG made "insufficient inquiries" about the process that Syndicate 218 used to review insurance claims and to ensure its financial reserves, meaning there was “insufficient evidence to provide an unqualified audit opinion," while Syndicate 218’s in-house accountant had also handled the review process in a "wholly improper" way, and failed to keep proper records.

Following the nearly decade-long probe into the accounts of the firm, based at the Lloyds of London market, the FRC told KPMG to undertake an internal review over the way it would audit an insurance company in the future. On top of this, KPMG Partner Mark Taylor and former Partner Anthony Hulse have each been fined £100,000, and Douglas Morgan, a Director at Syndicate 218, was also punished. Morgan, the in-house accountant named in the report, has been excluded from membership of the Chartered Institute of Management Accountants for two years.

KPMG reprimanded as Big Four break-up talk grows

While the news is not particularly unusual, as top auditing firms have routinely been fined by the FRC in recent years, it comes just months after KPMG was taken under special observation by the watchdog. The FRC censured the firm in an unprecedented move, and inspected a quarter of all audits by KPMG for the rest of 2018, citing an “unacceptable deterioration” of the group’s accounting work.

At the same time, a ‘severe reprimand’ does not add to the direct financial punishment which KPMG will suffer, but the FRC believes it does make the ruling more severe. A spokesperson explained that while a reprimand has no effect financially, “it is a stain on their reputation and will be considered by other companies when they are thinking about changing their auditors."

A KPMG spokesperson said, "We are disappointed that aspects of our 2008 and 2009 audits were found not to have met the standards set by our regulator. Since this work was conducted, we have changed our insurance audit approach considerably, including how we work with actuaries when auditing insurance claims reserves. We will continue to work hard to put historical matters such as this to rest as quickly as possible."

The FRC is also investigating KPMG’s audit of the government contractor Carillion, which collapsed under £1 billion of debt in 2018. The probe is examining whether the organisation’s auditor failed to adhere ethical and technical industry criteria, which could carry a hefty fine, should KPMG be found against.

Big Four break-up

KPMG’s latest rollicking comes at a particularly delicate moment for the Big Four – also including PwCDeloitte and EY – in the UK market. The quartet have been repeatedly pilloried, following strong criticisms of the firms after a series of auditing failures such as the cases of BHS and Carillion.

Such is the scrutiny of the professional services sector that the UK’s competition watchdog has called for rapid legislation to end the dominance of the Big Four accounting firms and address problems of poor working practices and conflicts of interest in the scandal-hit audit sector. The Competition and Markets Authority’s report into the sector stopped short of demanding a full break-up of Deloitte, EY, KPMG and PwC; it did, however, recommend the firms split their operations by separating their audit businesses from their consultancy arms.

The report prompted a rebuttal from Tamzen Isacsson, who warned that regulation could undermine the UK’s multi-billion consulting services sector. The newly installed Chief Executive of the Management Consultancies Association recently said that under her leadership the MCA would “campaign to bust some of the myths about what we do and how we do it” in the consulting industry.

“The Big Four may not like it, they may seek to undermine the case for reform, but vested interests should not be allowed to get in the way of positive change.”
– Business Select Committee Chair Rachel Reeves

Isacsson said of the CMA report, “The consulting sector in the UK is highly competitive and our members are committed to the highest standards of ethics, client value and service, and to avoiding conflicts of interests… The UK is a leading centre in the world for consulting services and we need to ensure that regulation does not undermine this position for a sector which is worth over £10 billion to the UK economy. Structural break-ups of companies would be impractical to manage and we are pleased to see this is not a recommended proposal, given these are massive global organisations and this would undermine our position globally...”

However, in spite of such warnings, Parliament recently echoed the idea of breaking up the Big Four in the interest of competition, and avoiding conflicts of interest. A report from the Business Select Committee, published in April, saw MPs claim it is impossible for staff in the businesses' audit arms to offer truly independent oversight of a client's books, and subsequently called for each Big Four firm to divide in two.

Labour MP Rachel Reeves, Chair of the committee, said, “For the big firms, audits seem too often to be the route to milking the cash-cow of consultancy business… Change is needed to deliver for investors, workers and the public… The Big Four may not like it, they may seek to undermine the case for reform, but vested interests should not be allowed to get in the way of positive change.”

Related: Kingman Review says FRC should be replaced 'as soon as possible'.