The Financial Reporting Council is investigating KPMG for failing to spot large-scale bribery at Rolls-Royce. But there are serious questions whether the regulator, which is yet to impose a sanction in a corruption-related case, will carry out a proper inquiry.
In this post and the next, I’ll look at the Financial Reporting Council’s poor track record in bribery-related cases, and I’ll examine the deep-seated causes behind the regulator’s general reluctance to pursue an aggressive enforcement strategy against major audit firms.
The Financial Reporting Council (FRC) investigation into KPMG — which audited Rolls-Royce’s financial statements for over 20 years during which time the UK-based manufacturer paid millions in bribes across multiple countries — is only the second time that the regulator has opened an inquiry into alleged misconduct linked to overseas corruption.
The other case also concerned KPMG, but for its audits of BAE Systems, which in 2010 entered into a $450 million corruption-related global settlement with the DOJ and SFO and pleaded guilty. However, the FRC closed the BAE case in 2013 after a three-year investigation, claiming the inquiry, which looked at possible misconduct between 1997 and 2007, was no longer in the public interest as too many years had lapsed since the alleged wrongdoing.
The FRC’s foot-dragging in the BAE Systems case provoked strong criticism at the time. Two London-based civil society groups, The Campaign Against Arms Trade and The Corner House, threatened legal action against the FRC, saying the regulator had dropped the investigation despite strong evidence of a failure of oversight on the part of KPMG. The auditor failed to pay particular attention to corruption allegations against BAE published in the Guardian from 2003 onwards, the civil society groups said.
The FRC’s BAE case has receded from the memory of most, but it is important that the regulator learns from its previous mistakes and avoids similar shortcomings in its Rolls-Royce investigation. It is imperative that the FRC carries out a full and thorough investigation into KPMG’s audits of Rolls-Royce, and, unlike the BAE case, gets to the bottom of whether the auditor should have done a better job at spotting evidence of corruption.
Unfortunately, the FRC’s poor track record suggests that a full and proper investigation may not be in the cards. Since 2008, UK authorities have imposed sanctions in 24 cases linked to foreign bribery, and launched many more investigations, but to date the FRC has not fined a single auditor in a case related to overseas corruption.
In one case, Ian Foxley, a former lieutenant-colonel in the British army and the primary corruption whistleblower against EADS subsidiary GPT Special Project Management, offered the FRC evidence of possible wrongdoing by the company’s auditor KPMG.
GPT is accused of paying bribes in connection with a multi-billion dollar deal, facilitated by the UK government, to supply communications equipment to the Saudi National Guard. Foxley, in a letter shared with the FRC, said GPT’s auditors KPMG were aware of possible corruption as early as 2007, but did not report inconsistencies in the company’s accounts till 2011.
In the same letter, Foxley said: “It is highly surprising that the FRC has not made any effort to contact me at all in order to ascertain the part that KPMG played in the audit of the company and whether they are culpable.”
KPMG denies the allegations that Foxley has made against it. The audit firm also said it disagreed with claims that the FRC is lax in its approach to enforcement.
In the next post, I’ll look at the FRC’s tendency to impose small and inadequate fines, as well as the reasons behind the regulator’s lacklustre approach to tackling wrongdoing by major audit firms.
Rahul Rose is a senior researcher for Corruption Watch, a London-based NGO that undertakes cross-border investigations into grand corruption and pushes for effective enforcement of UK anti-corruption legislation. He can be contacted here.