KPMG fined £6m over Lloyds syndicate audit failures

Big Four firm KPMG has been fined £6m by the Financial Reporting Council (FRC) following a long running investigation by the regulator into misconduct in the firm’s auditing of a Lloyds syndicate

The firm has also agreed to undertake an internal review of ‘certain aspects’ of its 2018 audits of insurance undertakings.

The sanctions follow the conclusion of the audit regulator’s investigations into the preparation and audit of Lloyd’s Syndicate 218 (Equity Red Star) report and accounts for the years ended 31 December 2007, 2008 and 2009, and the provision of actuarial advice to Equity Syndicate Management Ltd (ESML) in relation to ESML’s reserving for Lloyds Syndicate 218 between 2007 and 2009.

These matters were first referred to the FRC in 2012, and a formal complaint was delivered in August 2016. The inquiry began after a £311m shortfall was discovered in the car and motorbike insurer’s accounts, which forced its parent company to inject millions of pounds into the business.

As well as the fine, KPMG has been severely reprimanded and required to undertake an additional internal review and report to the FRC on certain aspects of its 2018 audits of insurance undertakings (to which Solvency II applies and Lloyds Syndicates).

KPMG partner Mark Taylor has been fined £100,000, severely reprimanded and agreed to the imposition of a requirement to have a second partner review of his audits until the end of 2020. 

Former KPMG Anthony Hulse has been fined £100,000 and received a severe reprimand and Douglas Morgan, a former finance director of ESML, has excluded from membership of CIMA for two years.

The FRC said KPMG’s and Taylor’s misconduct arose from KPMG’s 2008 and 2009 audits of the financial statements of Syndicate 218.  The findings against Hulse relate only to the 2009 audit. Taylor was an associate partner and the responsible individual for the audit of Syndicate 218 and Hulse was the audit engagement partner for the ultimate UK parent undertaking of the corporate member of the syndicate. 

The tribunal found that in both years insufficient enquiries were made regarding the claims file review process and warning signs of deterioration in the syndicate’s claims reserves were not acted upon, and consequently there was insufficient evidence to provide an unqualified audit opinion.

Morgan’s misconduct arose from claims file reviews carried out within the business, and under his direction, and which involved claims reserves held by the syndicate being reduced to meet a pre-determined target.

The tribunal found that the reviews were ‘wholly improper’ and also that Morgan had failed to ensure that proper records were made, or that the reviews were properly disclosed to the board, the syndicate's external actuary or the auditors.

The FRC’s investigation into Syndicate 218 also considered the conduct of the syndicate's external actuary, who admitted misconduct and received a severe reprimand and a fine in August 2017.

The tribunal made costs orders against all of the respondents.

A KPMG spokesperson said: ’We are disappointed that aspects of our 2008 and 2009 audits were found not to have met the standards set by our regulator.

‘Since this work was conducted, we have changed our insurance audit approach considerably, including how we work with actuaries when auditing insurance claims reserves.

‘The tribunal accepted that KPMG has taken, and continues to take, steps to improve audit performance and in its last inspection report, the FRC acknowledged our work in this area as an example of good practice.

‘We will continue to work hard to put historical matters such as this to rest as quickly as possible.’

FRC Disciplinary Tribunal Report against KPMG and others over Equity Syndicate Management Limited issued 14 May 2019

Pat Sweet

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