KPMG hit with £6m fine over Equity Red Star audit

The Financial Reporting Council (FRC) has fined KPMG £6m over two flawed audits it performed in relation to the accounts of Equity Syndicate Management Ltd (ESML) 10 years ago

The Big Four firm, which was severely reprimanded over its work on the 2008 and 2009 financial statements of Lloyd’s Syndicate 218 (Equity Red Star), has also agreed to carry out an additional internal review and report back to the FRC on “certain aspects of its 2018 audits of insurance undertakings”.

Two of its partners, Mark Taylor and Anthony Hulse (who has now left the firm), were also sanctioned. Both received severe reprimands and were fined £100,000 each, while Taylor agreed to having his audits reviewed by a second partner until the end of 2020.

Taylor was the audit partner for Syndicate 218, a Lloyd’s motor insurance underwriter, while Hulse was the audit engagement partner for IAG Holdings, then the UK parent of Syndicate 218. Both are ICAEW members.

The findings against KPMG and Taylor relate to the 2008 and 2009 audits while the findings against Hulse relate to 2009 only.

According to the FRC, in both years, they made insufficient enquiries about the claims file review process. “Warning signs of deterioration in the Syndicate’s claim reserves were not acted upon, and consequently there was insufficient evidence to provide an unqualified audit opinion,” the regulator said.

Commenting on the sanctions, 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.”

The FRC also sanctioned Douglas Morgan, a CIMA member and a former director of ESML. He was excluded from membership of CIMA for two years.

His misconduct related to claims files reviews carried out by the company under his direction over the period 2007 to 2009. These involved claims reserves held by the Syndicate being reduced to meet a pre-determined target. The reviews were “wholly improper”, the tribunal said.

The tribunal also found 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.

In August 2017, Deloitte partner James Racow was severely reprimanded and fined £75,200 by the FRC after he admitted misconduct over his provision of actuarial services to ESML and Syndicate 218.

He admitted misconduct in relation to the 2008 and 2009 years, and accepted that his conduct fell short of the standards reasonably to be expected of a member of the Institute and Faculty of Actuaries.

He was investigated over the advice he gave ESML on the Syndicate 218 reserving. According to the FRC’s findings, as a result of his failings, Racow was not in a position to sign – and so should not have signed – the 2008 and 2009 statements of actuarial opinion in relation to Syndicate 218.