KPMG Auditor, who has an image of tainted bean counter in the market, was recently reprimanded severely and was fined £6 million by the Financial Reporting Council (FRC) for mishandling the audit of the Equity Red Star (ERS), UK’s largest specialist car and motorbike insurer. The regulators reported that KPMG auditor gave a clean bill of health to the Equity Red Star and was unsuccessful in spotting some serious problems going on in the company at that time.
In 2010, Equity Red Star, part of a union that insures one in four British motorbikes, had lost £194 million due to failure of setting out enough cash to cover payouts for claims. The Financial Reporting Council pointed out that KPMG should have paid more attention to the accounts of Equity Red star and should have raised the alarm at that point itself, which it had failed to do. The auditor’s current and former partner, Mark Taylor, and Anthony Hulse, have also been fined £100,000 each for their contribution in the whole fiasco.
The former director of Equity Red Star, Douglas Morgan, was accused of handling the review process in an improper way. He was held accountable for his failure in maintaining proper records and also for not disclosing all the information properly to the company’s board and auditors . He, thus, had to bear the brunt of the incident and was banned to work in the accounting industry for the next two years.
Although it can be argued that the fines that sound large can easily be dwarfed by the high UK revenues of KPMG that stood at £2.3billion last year; whereby, each of the partners earned £601,000 on an average. And also, it is not a strange occurrence for big auditing firms to be reprimanded or fined over their work. To this statement, an FRC spokesperson replied that while a fine may not have any effect on KFG financially, their reputations will obviously take a toll. This will further have an effect on other companies that are considering changing their auditors as they will most likely choose not to hire KPMG for its tainted image and reputation..
But yet many claim that these penalties do not suffice for the wrongdoings of these companies and will more than likely not make any difference on how these companies operate. It is due to this reason that the Financial Reporting Council is now being substituted by a new authority for it is said that it has failed to hold the auditors to account properly.
In retrospect, KPMG is also trying to gain their respect back in the market by releasing apologetic and determined statements. A KPMG spokesman admitted that they are disappointed that their 2008 and 2009 audits did not meet the standards that were set by the regulator. But he also proclaimed that they have changed their insurance audit approach greatly since then and that the company would work hard to rectify their past mistakes and gain trust back of other companies.