'Below' standard Independent audit costs KPMG £1.6m

The conduct of the lead audit partner and KPMG over the audit of collapsed
insurance company Independent ‘fell seriously below’ what was expected, the
profession’s disciplinary body has concluded and imposed fines totalling half a
million pounds.

The tribunal Joint Disciplinary Scheme issued its report into Independent
Insurance this week revealing that the firm would also be ordered to pay costs
of £1.15m. Both the firm and the partner, Andrew Sayers, have been reprimanded.

The fine against the Big Four firm amounts to £495,000 while Sayers’ fine is
£5,000.

The conclusions were reached through what is known as a Carecraft Agreement
where the facts of the case are agreed and the penalties are recommended by the
parties facing the complaint. They are then confirmed or rejected by a tribunal.

The complaints against Sayers and KPMG focused on Independent’s audit for the
year ending 31 December 2000, and revolved around the purchase of ‘stop-loss’
insurance by Independent to cover the downturn in its business during 1999. The
downturn continued through 2000 and in January 2001 KPMG was informed that
further insurance was being bought.

The upshot of the policies was that for a premium of £77m Independent could
turn a loss of £105m into a profit of £22m.

Such an outcome should have caused suspicion that there must be other
arrangements in place because on the face of it the deal was certain to turn
into a loss for the underwriters.

The complaint against Sayers was based on the fact that though suspicious he
only sought a letter from management that everything was alright, instead of
taking the advice of his ‘concurring partner’ and seeking confirmation of the
policies from the reinsurers.

In truth there were other plans in place, undisclosed to the auditors,
including a pledge of £141m by Independent to the reinsurers plus a different
stop loss policy which required the payment of £1.6bn over four years in
premiums.

KPMG and Sayers faced complaints that they failed to keep adequate records of
their meetings and placed inappropriate reliance on management assurances. They
also failed to seek third party proof of what they were being told by
management.

The tribunal report said an ‘auditor in good standing should not have placed
such complete reliance on management representations but should have sought
independent third party evidence from the reinsurers and engaged in a full and
open discussion with the Audit Committee.’

Last year Independent’s chief executive Michael Bright, and former finance
director Dennis Lomas, were sentenced to seven and four years imprisonment
respectively in relation to deceiving the board and the markets.

KPMG this week expressed regret for events at Independent but reiterated that
information had been withheld from the auditor and the firm was ‘one of many
victims of that fraud’.

‘The complaints on which the settlement is based relate to an audit
engagement which took place more than seven years ago. Any lessons that were to
be learned from the failure of Independent Insurance were taken on board very
soon after its collapse and our audit processes and controls have been enhanced
since then as part of our continual improvement process,’ the firm said.

Sayers is understood to be still working for KPMG but no longer in audit.

Read on:

Independent
Insurance FD found guilty

Bright
defends Independent Insurance cover up claims

Independent
Insurance boss lashes out at Big Four auditor

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to read the full JDS report