The UK’s Financial Reporting Council (FRC) has fined KPMG UK £6m ($7.8m) in relation to its audits of Lloyd’s of London based firm Lloyd’s Syndicate 218 (Equity Red Star) and actuarial advice for Equity Syndicate Management (ESM).
A KPMG partner, Mark Taylor, former partner Anthony Hulse, and a former director of ESM Douglas Morgan have also been fine and/ or sanctioned.
As well as KPMG’s fine, it was also severely reprimanded. The firm has agreed to undertake an additional internal review and report to the FRC on certain aspects of its 2018 audits of insurance undertakings.
Taylor was fined £100,000, severely reprimanded and agreed to the imposition of a requirement to have a second partner review of his audits until the end of 2020.
Hulse was fined £100,000 and received a severe reprimand. Morgan has been excluded from membership of the Chartered Institute of Management Accountants for two years.
KPMG and Taylor’s misconduct was related to the audits for the years 2008 and 2009 (Equity Red Star) while Hulse’s misconduct only related to the 2009 audit. The FRC’s tribunal found insufficient enquiries were made regarding the claims file review process and warning signs of deterioration in the Syndicate’s claims reserves were not acted upon, and consequently there was insufficient evidence to provide an unqualified audit opinion.
Morgan’s misconduct arose from claims file reviews carried out within the business, and under his direction, and which involved claims reserves held by the Syndicate being reduced to meet a pre-determined target.
The tribunal found that the reviews were ‘wholly improper’ and further 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.
A spokesperson for KPMG 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