Clarity lacking in tribunal report on KPMG’s Carillion, Regenersis failings

The report, published Tuesday by the U.K. Financial Reporting Council (FRC), is also meant to spell out how the regulator reaches enforcement decisions and disciplines noncompliance, but the sanctions against the firm compared to its employees seem notably disproportionate.

KPMG self-reported its concerns to the FRC that auditors working on audit quality reviews (AQRs) for Carillion and Regenersis created false minutes and tampered with spreadsheets and lied about it. The firm subsequently admitted misconduct and cooperated with the FRC’s investigation, resulting in its fine being reduced from 20 million pounds to £14.4 million (then-U.S. $17.4 million) when the FRC announced its penalties in July.

The tribunal was “favorably impressed” by the actions taken by KPMG to prevent misconduct in future audit engagements. These included:

• Obtaining approval from KPMG’s beefed-up central inspection support team if auditors want to provide any information to the AQR that is not on the audit file;
• Having a requirement to make sure the source of any information provided outside the audit files is “something which existed prior to the signed opinion, is from prior year audit files, or is a newly created document”;
• Providing a dedicated section on the KPMG intranet about AQRs that contains links to internal policies and guidelines to assist audit team members; and
• Implementing changes to AQR training, guidance, and supervision.

The five individuals—who had more to lose—duly lost more, largely because they either didn’t admit guilt or because they put their hands up too late. All except Pratik Paw, the most junior member of the team, were fined and barred from the profession.

Peter Meehan, the senior audit partner, received a £250,000 fine (then-U.S. $301,000) and a 10-year ban—the aim being the 60-year-old would never work in the profession again.

Adam Bennett was fined £40,000 (then-U.S. $48,000) for allegedly involving another team member in creating an updated version of Regenersis’s goodwill paper. Alistair Wright was initially set to be fined £100,000 (then-U.S. $120,000)—roughly twice his net annual earnings—but ultimately received a £45,000 (then-U.S. $54,000) penalty.

Before the case, Wright had an “unblemished” record and was set to be a partner. “That future has been destroyed,” the report said. “The financial impact of our findings for him will involve a loss of income of several million pounds.”

Richard Kitchen, a junior member of the team but the only one who knew the final version of the Excel spreadsheet did not represent work done during the Carillion audit, was fined £30,000 (then-U.S. $36,000). His alleged misconduct—limited to just two or three days—stemmed from trying to complete the work before heading off on his honeymoon.

While the conduct was dishonest, the tribunal said, “[T]here was no actual loss or risk of financial loss.” None of the individuals stood to derive any immediate financial gain from their alleged misconduct, it added.

Meanwhile, KPMG UK’s penalty was a drop in the bucket of its total 2021 revenue of more than £2.4 billion (U.S. $2.6 billion). The firm has insurance to cover its fine—the individuals don’t.

So, why did the employees take the risk if there was seemingly no reward for them? The report provides no answers. In its 141 pages, it only mentions time pressures on team members twice, and that Paw, who claimed there was a hierarchy, “should have questioned” instructions he received from Wright, his manager.

While these auditors allegedly broke the rules and should be punished for it, KPMG’s recent track record with audit work—Revolution Bars Group, Rolls-Royce, Conviviality, and Co-op Bank—is hardly spotless. Yet, the tribunal chose not to examine the firm’s work in the round when considering penalties.

If people were expecting clarity about the way the FRC hands out sanctions, they might still have to wait.