Regulators

FRC confirms £3.3m fine for KPMG over Rolls-Royce audit

The FRC said the findings against each of the respondents relate to ‘failures to address matters identified in the audit which indicated risk of non-compliance by the company with laws and regulations’

The Executive Counsel of the Financial Reporting Council (FRC) has issued a £3.3m fine to KPMG Audit plc (KPMG) and Anthony Sykes, Audit Engagement Partner over its statutory audit of the consolidated financial statements of Rolls-Royce Group plc for the financial year ended 31 December 2010.

Along with the fine, which was reduced from £4.5m for KPMG’s cooperation, the FRC also imposed non-financial sanctions, comprising:

  • A requirement that KPMG shall commission a review by an appropriate external independent expert of the effectiveness of the firm’s policies, guidance and procedures for audit work in the area of an audited entity’s compliance with laws and regulations
  • A Severe Reprimand
  • A declaration that the Statutory Audit Report for the audit did not satisfy the Relevant Requirements.

Meanwhile, Sykes was personally fined £112,500. KPMG will also pay Executive Counsel’s costs of the investigation.

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The FRC said the findings against each of the respondents relate to “failures to address matters identified in the audit which indicated risk of non-compliance by the company with laws and regulations”.

The matters concerned two sets of payments made by the company to agents in India. These payments gave rise to “allegations of bribery and corruption” which later formed two (out of twelve) counts in a Deferred Prosecution Agreement with the Serious Fraud Office in 2017, under which Rolls-Royce plc paid large fines. 

The regulator added that allegations of bribery and malpractice through the use of intermediaries and ‘advisers’ in the defence field were “prominent” at the time of the audit, including that in March 2010 when [Defence Company A] paid large fines to settle US and UK criminal investigations resulting from the use of intermediaries. KPMG were well aware of these matters having also been auditors of [Defence Company A].

It added that as such the respondents failed to “exercise professional scepticism, to obtain sufficient, appropriate audit evidence and document this on the audit file, and to achieve sufficient Engagement Quality Control”

Claudia Mortimore, deputy executive counsel to the FRC, said: “It is essential that auditors are alive to the risks of companies’ non-compliance with laws and regulations, and conduct work in this area with care and sufficient professional scepticism. This is particularly so when the audited entity is in a sector where such risks are known to be prevalent.

“The package of financial and non-financial sanctions imposed in this case should help to improve the quality of future audits.” 

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