KPMG auditors misled regulators during inspections of their work on the audits of outsourcers Carillion and Regenersis, the accounting firm’s UK boss said.
The Financial Reporting Council accused the Big Four firm and six of its former auditors of forging documents and misleading its inspectors as the UK accounting watchdog opened its case before an industry tribunal on Monday.
The watchdog accused the firm and the six individuals of dishonesty and lack of integrity in their responses to FRC staff during routine quality inspections of the audits of the financial statements of Carillion for the year to December 2016 and Regenersis for the year to June 2014.
The case threatens to further damage the reputation of KPMG, which has ceased bidding for UK government work after its involvement in a series of scandals including misconduct in the sale of bedmaker Silentnight, for which it was fined £13m in August.
KPMG’s UK chief executive Jon Holt said in a media statement that it was “clear . . . misconduct has occurred and that our regulator was misled”.
“It is unacceptable, we do not tolerate or condone it in any way, and I am very sorry that it occurred in our firm,” he added.
Inspections assess the quality of auditors’ work, including by examining key judgments and whether auditors have obtained enough evidence to justify their conclusions.
At the opening of a hearing, expected to last five weeks, lawyers for the FRC said some auditors at KPMG working on the accounts of Regenersis, a London-listed IT company later renamed Blancco Technology Group, had created documents that were a “fabrication”. These were then “passed off” as if they had been created earlier, before the audit had concluded.
The FRC also alleged that the auditors created new documents during the inspection of the audit of Carillion’s accounts, including minutes of meetings relating to international aspects of the audits.
The tribunal was shown an example where additions were made to a document in red font and an email from one of the auditors, Alistair Wright, to another, Pratik Paw, saying they should “paste” words into documents created earlier that year.
The individual defendants — Peter Meehan, the lead partner on the Carillion audit, Wright, Richard Kitchen, Adam Bennett, Paw and Stuart Smith — have each denied allegations of wrongdoing.
KPMG, which self-reported the alleged wrongdoing to the FRC, is a defendant because it would be vicariously liable for any misconduct by its auditors. A settlement cannot generally be agreed between the FRC and a firm accused of wrongdoing if no individual has admitted to misconduct.
The FRC did not allege that KPMG’s audits of Carillion or Regenersis were flawed. It is running separate investigations into possible failings in the Carillion audits. Carillion’s liquidators are preparing a £250m negligence claim against KPMG.
Carillion collapsed four years ago after receiving clean audit opinions. It had liabilities of £7bn and £29m of cash, fuelling debate over reform of the UK audit sector and boardroom regulation.
Lawyers referred during Monday’s proceedings to a possible settlement between Smith and the FRC but details were not disclosed. When asked by the Financial Times, Smith’s lawyers did not confirm whether he had admitted wrongdoing as part of any settlement.
All six of the auditors named as defendants before the tribunal were initially suspended and had now left the firm, KPMG said.
The hearing continues.
KPMG admits ‘misconduct’ as regulator alleges forgery by Carillion auditors
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