UK tribunal raises questions on responsibility of junior auditors against KPMG

The audit and accounting regulator’s disciplinary tribunal, which is set to enter its fourth week on Monday, focused on claims that the professional-services firm provided forged documents and misleading information during an audit inspection. The audits in question belonged to British construction company Carillion plc, which closed in 2018, and data-erasing company Blanco Technology Group plc, which continues to operate.

In addition to KPMG and audit leaders Peter Meehan and Stuart Smith, in September the FRC filed a complaint against Adam Bennett, Richard Kitchen, Prateek Pav and Alistair Wright, who held various managerial roles during one or both of the audits.

The inclusion of junior auditors in the complaint indicates the FRC is tightening its focus on audit enforcement, said Gareth Rees, a partner at the law firm Morrison & Foster LLP, which handles UK regulatory litigation matters. On January 18, the FRC said it expected to pursue more enforcement cases over the next few years.

“Alleged conduct found [in the KPMG case] was very serious and the FRC clearly thought it could not ignore it,” Mr Rees said.

The regulatory and UK audit industry overall has been under scrutiny in recent years following a string of corporate scandals, including the demise of Carillion, cafe chain Patisserie Valerie Ltd and department-store chain BHS Ltd, resulting in a variety of reform proposals . area and its monitoring. As part of the overhaul, the FRC will be transformed into a new regulator called the Audit, Reporting and Governance Authority, which is set to launch in 2023.

The FRC has ordered audit firms to pay higher average fines in recent years. During the year ended March 31, 2021, financial sanctions totaled £16.7 million, equivalent to $22.35 million, a 1.2% increase from a year earlier. Much of this came from a record £15 million fine against Deloitte LLP in 2020 over failures to audit software company Autonomy Corp, which was acquired by Hewlett-Packard Company for $11.1 billion in 2011. Deloitte is a sponsor of CFO Journal.

In most audits, the junior employee reviews the client’s working papers and accounts, while the engagement partner signs off on his work and takes full responsibility for it. “The junior team does all the leg work, but the ultimate responsibility for the quality and accuracy of the work falls on the partner, until the junior team goes out of line as can happen here,” Mr. Rees said.

Mr. Meehan led the fiscal-2016 audit for Carillion, while Smith played that role for the fiscal-2014 audit of Blanco, then known as Regeneres plc. Mr. Paw, who was then a 25-year-old assistant manager at Carillion Audit, and Mr. Bennett, an assistant manager at Regeneresis Audit, took on more junior roles in their respective functions. Mr. Bennett was promoted to manager in October 2014 following the Regenesys audit and served as senior manager at Carillion Audit.

The FRC usually holds a tribunal if it is unable to reach a settlement with those accused of infringement, requiring the parties involved to admit wrongdoing. KPMG admitted on January 10 that its auditors, who are no longer with the firm, misled the regulator.

John Holt, chief executive officer of KPMG’s UK unit, said at the time: “This misconduct is a violation of our processes and clearly against our values. I am saddened that some relatively junior former members of staff have been subjected to very serious regulatory sanctions.” facing. A starting point in his career.” A KPMG spokesperson declined to comment further.

One of the accused former auditors, Stuart Smith, is no longer part of the tribunal after agreeing to a £150,000 fine and a three-year ban from the Institute of Chartered Accountants in England and Wales, a professional organisation. Mr. Wright, manager of audits for both companies, acknowledged some misconduct, while denying other FRC claims.

KPMG said it had reported alleged issues with the Carillion and Regeneres audits to the FRC and suspended the five auditors involved – all individual defendants except Mr Kitchen, who left in May 2018 – provided by them. After detecting possible problems with the given information. , The FRC named KPMG as the defendant because under UK law the firm is indirectly liable for misconduct committed by its auditors.

The hearings, which are expected to last a total of five weeks, can result in fines, individuals being banned from the profession and other sanctions, usually decided months after the conclusion of the tribunal. A settlement with the FRC generally leads to a lower fine, a quicker outcome and less publicity than a tribunal, Mr Rees said.

The FRC recently held other tribunals in matters such as the Deloittes Autonomy Audit and the audit of KPMG’s bedmaker Silentnight Holdings Plc. The latter case resulted in a £13 million fine, among other sanctions, against KPMG and a former partner in August.

In recent years Big Four firms have taken steps in the UK and elsewhere to invest more in training, technology and audit quality. PwC said in June that it planned to spend $12 billion on these measures by 2026, while in 2019 KPMG pledged to invest $5 billion over five years.

The FRC’s US counterpart, the Public Company Accounting Oversight Board, likewise often focuses on the role of senior auditors in cases of alleged audit misconduct as opposed to junior auditors, said Daniel Goelzer, a former US Securities and Exchange Commission general counsel. And the former acting president said. of PCAOB.

On 28 January UK MPs supported the appointment of Jan du Plessis as the new chairman of the FRC. Darren Jones, chairman of the Business, Energy and Industrial Strategy Committee, said, “We expect Sir John to now demonstrate the independence, challenge and drive to ensure that the FRC audit can intervene to correct problems in the area.” …”. a statement.

Mr du Plessis previously told parliament he planned to overhaul the regulator to improve his governance. The UK government is also reviewing feedback on a range of proposals to reform the country’s audit sector, including putting a cap on the number of audits that can be conducted by Big Four firms.

EY and PwC did not respond to a request for comment. The FRC and Deloitte declined to comment.