The Financial Reporting Council (FRC) has fined and reprimanded KPMG and partner William Smith over admitted misconduct relating to their audit of Quindell, the scandal-ridden insurance outsourcing firm.
KPMG are to pay £3.2m, (discounted from £4.5m), while Smith will be fined £84,000, (discounted from £120,000), reduced as they chose to settle the case. KPMG will also cover the FRC’s executive counsel’s costs, which amount to £146,000.
The misconduct relates to Quindell’s financial statements for the period ended 31 December 2013, the first year KPMG audited the company.
After a period of exponential growth Quindell was rocked by a report from US short-seller Gotham City Research in 2014, which blasted the company’s finances and claimed that up to 80% of reported profits were “suspect”.
Despite denying the report’s findings and suing for libel, an independent review by PwC found that some of Quindell’s accounting policies were at the “aggressive end of acceptable practice” while others were “not appropriate”, forcing the company to restate its accounts.
The FRC began looking into the accounts and potentially misleading statements made by Rob Terry, Quindell’s founder and chairman who was ousted after a controversial share-buying scheme controversy emerged.
KPMG’s misconduct was specified to two audit areas – “revenue recognition for legal services” and “a series of transactions relating to the sale and purchase of software licenses, related services and investments.”
A spokesperson for KPMG conceded: “We accept the FRC’s findings that in two specific areas of the audit, our challenge for the year ended 31 December 2013 should have gone further.”
“As we stated in our audit opinion for the following year, certain information given to KPMG contradicted representations previously made by former members of management. Nonetheless, we accept the FRC’s findings that in two specific areas of the audit, our challenge for the year ended 31 December 2013 should have gone further.”
Quindell, which was rebranded as Watchstone Group, is also the subject of a criminal investigation by the Serious Fraud Office (SFO).
The professional services division of the business was sold to law firm Australian law firm Slater and Gordon for £637m, but in 2016 the law firm launched a £600m lawsuit against the Watchstone Group “on the basis that but for fraudulent misrepresentation it would not have entered into the transaction at all.”