KPMG hit with yet another audit fine but firm insists it has changed

The big four accountant has supplied a lengthy list of the measures taken to improve its work after ‘historic’ problems. So why did it take the sanction to a tribunal?

James Moore
Chief Business Commentator
@JimMooreJourno
Tuesday 30 April 2019 11:15
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KPMG has been fined £6m over an insurance audit
KPMG has been fined £6m over an insurance audit

To the names Carillion, Rolls-Royce, Ted Baker, HBOS, Bargain Booze (Conviviality) and insurance claims handler Quindell, you can now add motorbike insurer Equity Red Star.

What have that unlovely lot got in common? They’ve all suffered from financial scandals and they were all audited by KPMG when the scandals occurred.

Outside the motorcycling fraternity, the last of those isn’t exactly a household name but it made quite a noise during the past decade until it started to shudder like a bike with a faulty exhaust in 2010.

The business, a Lloyd’s of London insurance underwriter, tumbled into the red having failed to set aside sufficient money to deal with a rash of personal injury claims.

An investigation was eventually launched into the auditing of the insurer by KPMG in 2007, 2008 and 2009. Ten years on from the last of those audits and an independent tribunal has found misconduct, fining the firm £6m, and both a current and former KPMG partner £100,000 each.

The announcement of the penalty represents yet another hit to the reputation of a firm that has taken so many whacks that its PR staff must have been issued with crash helmets.

Their job is to defend a brand that now looks barely tarnished. It may yet cause some big companies to ask whether they really want KPMG’s name listed on their roster of advisers, especially at a time when audit committees are facing increased scrutiny.

Were the firm to seriously wobble, it would cause a serious problem. The last thing regulators need is for the big four accountancy firms to become a big three, at least in Britain.

There’s nothing to really suggest that it’s happening at the moment. But it has to be a risk. Hence the firm’s keenness to show it has changed.

The company’s statement in response to the fine described the issue as “historic”, which it is given the audits in question were carried out more than 10 years ago when KPMG was also overseeing the accounts of HBOS, the mortgage bank it signed off as a going concern six months before the financial crisis showed it was anything but.

The firm is also making a big fuss about the steps it has taken to improve the quality of its work. I was sent a long list of them. They include auditors’ pay and promotions being tied to audit quality. They’re also getting more training.

There’s a board level committee that has been set up to keep tabs on the issue, and a “second line of defence” team has been created. The firm last year banned the sale of most consultancy services to the FTSE 350 clients it audits too.

It’s quite a show. But if it’s more than that, if this leopard really has changed its spots, how come the firm took the audit of this particular firm all the way up to a tribunal? KPMG says it disagreed with the sanction rather than the findings. But that’s not a great answer. It’s certainly not a good look.

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