Sanctions against KPMG and Anthony Sykes
News types: Generic Announcement, Investigations, Statements
Published: 24 May 2022
The Executive Counsel of the Financial Reporting Council (FRC) has issued a Final Decision Notice under the Audit Enforcement Procedure and imposed sanctions against KPMG Audit plc (KPMG) and Anthony Sykes, Audit Engagement Partner (together, the Respondents), in relation to the statutory audit of the consolidated financial statements of Rolls-Royce Group plc (the Company) for the financial year ended 31 December 2010 (the Audit).
The following sanctions have been imposed:
KPMG:
- A financial sanction of £4.5 million adjusted for admissions and early disposal to £3,375,000; and
- Non-financial sanctions, comprising:
- a requirement that KPMG shall commission a review by an appropriate external independent expert of the effectiveness of the firm’s policies, guidance and procedures for audit work in the area of an audited entity’s compliance with laws and regulations;
- a Severe Reprimand; and
- a declaration that the Statutory Audit Report for the Audit did not satisfy the Relevant Requirements.
Mr Sykes:
- A financial sanction of £150,000 adjusted for admissions and early disposal to £112,500; and
- Non-financial sanctions, comprising:
- a Severe Reprimand; and
- a declaration that the Statutory Audit Report for the Audit did not satisfy the Relevant Requirements.
KPMG will also pay Executive Counsel’s costs of the investigation.
The Adverse Findings against each of the Respondents relate to failures to address matters identified in the Audit which indicated risk of non-compliance by the Company with laws and regulations. The matters concerned two sets of payments made by the Company to agents in India. These payments gave rise to allegations of bribery and corruption which later formed two (out of twelve) counts in a Deferred Prosecution Agreement with the Serious Fraud Office in 2017, under which Rolls-Royce plc paid large fines.
Allegations of bribery and malpractice through the use of intermediaries and ‘advisers’ in the defence field were prominent at the time of the Audit, including that in March 2010 [Defence Company A] paid large fines to settle US and UK criminal investigations resulting from the use of intermediaries. KPMG were well aware of these matters having also been auditors of [Defence Company A].
The Adverse Findings, which were accepted by the Respondents, amounted to serious failures to exercise professional scepticism, to obtain sufficient, appropriate audit evidence and document this on the audit file, and to achieve sufficient Engagement Quality Control.
Executive Counsel does not assert that the breaches resulted in the financial statements being materially misstated. Furthermore, the breaches were limited to a discrete (albeit important) area of the Audit for one financial year.
The FRC’s investigation announced on 4 May 2017 was into KPMG’s conduct of the audits of the financial statements of Rolls-Royce Group plc for the year ended 31 December 2010 and of Rolls-Royce Holdings plc for the years ended 31 December 2011 to 31 December 2013. No findings of breaches have been made in respect of the audits for the years ended 31 December 2011 to 31 December 2013.
Claudia Mortimore, Deputy Executive Counsel to the FRC, said:
"It is essential that auditors are alive to the risks of companies' non-compliance with laws and regulations, and conduct work in this area with care and sufficient professional scepticism. This is particularly so when the audited entity is in a sector where such risks are known to be prevalent.
The package of financial and non-financial sanctions imposed in this case should help to improve the quality of future audits.”