Nicholas Medcroft QC and Daniel Carall-Green represented the Executive Counsel to the Financial Reporting Council, in proceedings for misconduct against KPMG, a former KPMG partner, and five former KPMG employees. They were instructed by a team at the Financial Reporting Council and Gowling WLG, and acted alongside Mark Ellison QC and Kathryn Hughes of QEB Hollis Whiteman.

The proceedings were about Audit Quality Review (“AQR”) inspections carried out by the FRC into KPMG’s audits of Regenersis plc and Carillion plc.

Regarding the Regenersis inspection, the Executive Counsel alleged that three KPMG auditors—Stuart Smith (a director), Alistair Wright (a senior manager), and Adam Bennett (a manager)—misled the AQR inspectors. Specifically, the Executive Counsel alleged that Mr Smith had misled the inspectors about the role that Peter Meehan, the non-audit relationship partner for Regenersis, played in the audit, and that Mr Wright and Mr Bennett misled the inspectors about the work that the KPMG audit team had done in relation to goodwill.

Regarding the Carillion inspection, the Executive Counsel alleged that five KPMG auditors—Mr Meehan (who was also Carillion’s audit partner), Mr Wright, Richard Kitchen (another senior manager), Mr Bennett (who by then had been promoted to senior manager), and Pratik Paw (an assistant manager)—misled the inspectors about minutes of clearance meetings that the KPMG group audit team had held with overseas component auditors and about the work that KPMG had done to select Carillion’s construction contracts for audit testing. Specifically, the Executive Counsel alleged that Mr Meehan, Mr Wright, Mr Kitchen, Mr Bennett, and Mr Paw had all been involved in creating false minutes during the inspection and presenting them to the inspectors as minutes created during the audit (which had taken place several months earlier), and that Mr Meehan, Mr Kitchen, and Mr Bennett had been involved in creating a false Excel spreadsheet purportedly documenting the work done on contract selection, and again presenting it to the inspectors as a paper created during the audit.

In all instances, the Executive Counsel alleged that the respondents had acted either deliberately or recklessly, and therefore that they had acted dishonestly, or at least with a lack of integrity, and in that way had committed misconduct and in breach of the ICAEW’s code of ethics.

The substantive hearing, which was before an independent tribunal chaired by Sir Stanley Burnton, started on 10 January 2022 and ran for five weeks. 

Shortly before the hearing, Mr Smith settled with the FRC on the basis that he had acted recklessly and without integrity, and had thereby committed misconduct. He agreed to be excluded from the ICAEW for three years and to pay a fine of £150,000.

Following the hearing, the tribunal decided that all the remaining respondents had committed misconduct: each of Mr Meehan, Mr Wright, Mr Kitchen, and Mr Bennett had been involved in the deliberate misleading of the AQR inspectors, and had acted dishonestly (save that Mr Meehan and Mr Bennett had only acted with a lack of integrity in relation to the contract selection issue); and Mr Paw had acted with a lack of integrity. KPMG admitted that it was liable for the individual respondents’ misconduct in accordance with the rules in the FRC’s Accountancy Scheme.

The tribunal’s decision was made public at a hearing on sanctions and costs on 12 and 13 May 2022. At that hearing, KPMG agreed with the Executive Counsel that the appropriate sanctions for the firm would be (i) a severe reprimand, (ii) a non-financial sanction requiring it to commission an external review of its AQR policies and procedures, and (iii) a fine of £20 million, reduced to reflect mitigating factors and admissions to £14.4 million. It remains for the tribunal to decide whether those sanctions are appropriate. The parties also made submissions at the hearing as to the appropriate sanctions on the other respondents, and the tribunal will rule on those in due course.

The full findings will remain confidential until the tribunal’s report is published under paragraph 9(13) of the FRC’s Accountancy Scheme.