KPMG has been reprimanded and handed a £4.5m fine from the Financial Reporting Council (FRC), and the firm’s audit engagement partner William Smith has been reprimanded and fined £120,000, following their admission of misconduct in relation to the audit of the financial statements of Quindell plc for the period ended 31 December 2013
Both KPMG and Smith, members of ICAEW, admitted their conduct fell significantly short of the standards reasonably to be expected of a member and a member firm and that they failed to act in accordance with the ICAEW’s fundamental principle of professional competence and due care.
The misconduct related to two audit areas and included failure to obtain reasonable assurance that the financial statements as a whole were free from material misstatement, failure to obtain sufficient appropriate audit evidence and failure to exercise sufficient professional scepticism.
The FRC said the audit areas concerned were revenue recognition for legal service, and a series of transactions relating to the sale and purchase of software licenses, related services and investments.
Quindell made prior-year adjustments in both areas the following year, in their financial statements for the year ended 31 December 2014.
A spokesperson for KPMG said: ‘Audit quality, and professional scepticism in particular, is of paramount importance to our firm. We have cooperated fully throughout the FRC’s investigation, and have already updated our audit processes and procedures to address the areas of concern.
‘We regret that some aspects of our audit for the year ended 31 December 2013 did not meet the required standards.
‘As we stated in our audit opinion for the following year, certain information given to KPMG contradicted representations previously made by former members of management. Nonetheless, we accept the FRC’s findings that in two specific areas of the audit, our challenge for the year ended 31 December 2013 should have gone further.’
The firm’s fine has been reduced to £3.15m because of a discount for settlement, and it is to pay £146,000 towards the costs of the regulator’s investigation, while Smith’s fine has been discounted to £84,000.
The FRC investigation into KPMG’s auditing at the insurance technology and claims management group started in August 2015, alongside a Serious Fraud Office (SFO) criminal investigation into the company’s business and accounting practices. The SFO investigation is ongoing, as is a Financial Conduct Authority (FCA) probe into Quindell.
KPMG took over as Quindell’s auditors from RSM Tenon, now part of Baker Tilly, in October 2013.
An earlier FRC investigation resulted in a £1m fine for audit firm Arrandco Audit Ltd, formerly RSM Tenon Audit Ltd (Tenon) and a £80,000 fine for the audit engagement partner Jeremy Filley after both parties admitted misconduct in relation to the audit of the financial statements of Quindell Portfolio plc and Quindell Ltd.
This related to the accounting treatment of the reverse acquisition of Mission Capital plc, and a number of transactions entered into in 2011 by Quindell entities and TMC (Southern) Ltd. These were both the subject of prior year adjustments in the financial statements of Quindell plc for the financial year ended 31 January 2014.
Report by Pat Sweet