FRC launches KPMG audit probes

THE UK REPORTING WATCHDOG is to scrutinise KPMG’s audit work after launching two separate investigations into the Big Four accountancy firm.

The Financial Reporting Council said yesterday it was investigating whether KPMG was independent when it audited Pendragon’s 2010 and 2011 financial statements, as well as investigating a partner’s shareholding in a client company.

It is understood the investigation relates to the appointment of former KPMG partner Mel Egglenton to Pendragon as a non-executive director in 2010, having left KPMG nine months earlier. It will look at whether KPMG undertook correct due dilligence in allowing a former partner to join an audit client. The FRC declined to comment on whether the investigation was connected to Egglenton.

Egglenton was recently appointed as chairman-designate at the listed business.

KPMG, which has audited the car dealer since 1997, said that, in relation to the 2010 and 2011 Pendragon audits, it remains of the view that its independence “was maintained”. Pendragon declined to comment.

“We take our professional responsibilities very seriously, have stringent policies and procedures in place to ensure that our independence is not compromised and regularly review those procedures to ensure that they remain appropriate,” KPMG said in a statement.

Pendragon had earlier been forced to correct its 2011 accounts after it overstated its cashflows from operations and investment activities, following a review by the FRC’s Financial Reporting Review Panel in August last year. As a result of the correction, made in the company’s interim results, cash inflow had been overstated by £31.1m. The FRRP said it was satisfied with correction and that the matter was closed.

The second investigation announced by the FRC relates to a “non-timely disposal of a shareholding” in a client company by an unnamed KPMG partner. KPMG said it had taken action against the partner concerned and is reviewing its procedures as a result of the ethical breach.

“We fully accept that the holding of shares in a client by a partner is in clear contravention of UK Ethical Standards,” KPMG said in statement.

“We are…very disappointed that one of our partners mistakenly failed to dispose of the relevant shares on a timely basis and that our firm’s procedures, in this instance, did not deal appropriately with that failure.”

The investigations are a fresh blow for KPMG after its US firm became embroiled in insider-trading scandal involving a partner that headed its Los Angeles audit practice.

Separately, the UK firm could also be investigated over its audit work at HBOS, which saw it give the bank a clean bill of health before it was subsequently rescued by Lloyds TSB. The FRC has yet to decide whether an investigation is necessary.