KPMG and one of its employees have admitted to misconduct in relation to work done by the audit firm for a division of US custody bank BNY Mellon in 2011.
Britain’s accounting watchdog said on Wednesday that KPMG and a partner at the firm, Richard Hinton, had admitted that their conduct “fell significantly short of standards” to be reasonably expected.
The admission is another embarrassing blow for KPMG, which has suffered a series of reputational setbacks this year over its work in the UK, South Africa and the US.
The case related to work done by KPMG on reports that were submitted to the UK financial services regulator, the Financial Conduct Authority. These reports, which referred to around £1tn of client assets held in custody by BNY Mellon, detailed how the US group complied with rules on safeguarding client assets.
The Financial Reporting Council said that none of BNY Mellon’s clients had lost money or assets as a result of the misconduct.
The regulator added that KPMG and the partner recognised that they had “failed to give adequate consideration” to whether the records of custody relationships maintained by BNY Mellon were compliant with UK rules designed to keep client money safe. The FRC added that KPMG “failed to undertake sufficient audit procedures” to support the opinions included in 2011 reports made to the FCA.
The FRC did not impose any penalties on KPMG as the regulator could not reach an agreement with the firm on the “appropriate sanctions”. A disciplinary tribunal will consequently be held to determine the penalty.
Erik Gordon, a professor at the University of Michigan’s Ross School of Business, said investors and the public would watch the tribunal with interest to determine whether the FRC “is a watchdog that will bite or whether it will be content to growl”. “The claim that nobody lost money should not reduce the penalties. That was a matter of luck that doesn’t lessen the danger the firm created,” he said.
A BNY Mellon spokesperson said the group was “aware of the conclusions” from the FRC’s report, but said it had no further “comment to make”. KPMG said that no client of BNY Mellon “suffered actual financial or other loss” and that its separate audit opinions on the bank’s financial statements “have not been called into question”.
However the firm added: “In 2011, the FRC issued new guidance applicable to client assets reports. We accept and regret that our work did not fully reflect all aspects of this new guidance. Since that time, there has been further fundamental change in the regulatory environment and we have significantly enhanced our . . . procedures and training to reflect this.”
KPMG has already been fined twice by the FRC this year, with a £2m penalty over its work for retailer Ted Baker and a £3m fine relating to work for insurance software firm Quindell.
In June, the FRC criticised the company for an “unacceptable deterioration” in the quality of its audit work for large listed companies in the UK. KPMG is also under investigation by the FRC for its work for collapsed UK contractor Carillion, which was audited by the firm for 19 years.
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