KPMG LLP agreed to pay a fine after the Financial Reporting Council found shortfalls in its audit of Rolls-Royce Holdings PLC, the British jet engine manufacturer that settled bribery allegations in 2017.
The U.K. audit regulator on Tuesday said it imposed sanctions of £3.4 million—equivalent to $4.2 million—against the professional-services firm and £112,500 against audit partner Anthony Sykes. The investigation, which the FRC announced in 2017, focused on KPMG’s audits of Rolls-Royce for the years ended Dec. 31, 2010, through Dec. 31, 2013. The FRC found no breaches of conduct in the audits spanning 2011 to 2013.
The FRC and the U.K. audit industry in recent years have faced scrutiny following a wave of corporate scandals, including the demise of defunct construction company Carillion PLC and department-store chain BHS Ltd. Those triggered various changes aimed at revamping the sector and its oversight. The FRC will be folded into a new regulator called the Audit, Reporting and Governance Authority, which is set to launch next year.
KPMG failed to adequately address the risk of Rolls-Royce violating laws and regulations in making two sets of payments to third-party agents in India, the FRC said Tuesday. The payments later became part of a U.K. criminal investigation into allegations of bribery and corruption at Rolls-Royce, resulting in the company in 2017 agreeing to pay £497 million to the U.K. government to settle the probe.
The FRC said it found “serious failures” by KPMG to gather sufficient evidence and exercise professional skepticism in its work on the 2010 audit. “It is essential that auditors are alive to the risks of companies’ noncompliance with laws and regulations, and conduct work in this area with care and sufficient professional skepticism,” Claudia Mortimore, the FRC’s deputy executive counsel, said.
KPMG is investing in training, controls and technology to improve the quality of the work provided by its audit practice, said Jon Holt, chief executive of KPMG’s U.K. business. “I’m sorry that elements of our work in the FY2010 audit of Rolls-Royce Group PLC did not meet the professional standards required,” Mr. Holt said.
Mr. Sykes, the partner who oversaw the audit, continues to work at the firm and plans to retire in September, a KPMG spokesman said. KPMG declined to make him available for an interview. A Rolls-Royce spokesman declined to comment.
The Rolls-Royce case is the latest of several settlements KPMG has made with the FRC this year. KPMG earlier this month said it would pay £14.4 million to settle charges that it deliberately misled the regulator during routine inspections that involved Carillion and data-erasure company Blancco Technology Group PLC, previously known as Regenersis PLC.
KPMG was also hit with a £875,000 fine in March over audits of bar chain Revolution Bars Group PLC.
Write to Mark Maurer at [email protected]
Corrections & Amplifications
Rolls-Royce Holdings PLC manufactures jet engines. An earlier version of this article incorrectly said the company also manufactures cars. (Corrected on May 24)
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Appeared in the May 25, 2022, print edition as ‘KPMG Fined in Rolls-Royce Audit.’
