KPMG fined £5m in UK over ‘exceptional’ breach in BNY Mellon audit

KPMG has been handed a £5 million fine for misconduct in work for BNY Mellon, the world's largest custodian bank, over breaches that were described as "truly exceptional" by British regulators.

The fine was awarded by an independent disciplinary tribunal and is due to be announced this week, according to two people familiar with the matter, dealing another blow to the reputation of the Big Four accounting firm.

The sanction, which follows an investigation from the UK Financial Reporting Council, brings the total fines levied on KPMG in UK to about £20 million since June 2018. That is more than the regulator imposed in fines on the entire accounting industry last year.

However, the size of the fine will also disappoint the council, the audit watchdog, which had called for KPMG to be fined a record £12.5 million over the botched reports. KPMG may also be granted a discount from the headline amount for admitting misconduct.

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KPMG and the Financial Reporting Council declined to comment.

The regulator said at a tribunal hearing in May that KPMG had “defeated” the British regulatory system by signing off BNY Mellon reports between 2007 and 2011 that failed to comply with rules on safeguarding client assets during the financial crisis.

The case related to work done by KPMG on reports that were submitted to the UK financial services regulator, the Financial Conduct Authority. These reports detailed how the US group complied with rules on safeguarding around £1tn of client assets.

KPMG and one of its employees admitted they had acted improperly but lawyers for the firm attacked the proposed penalty as “extravagant” and “gargantuan” at the disciplinary tribunal hearing in May. They argued the fine should be no more than £1.4 million as the misconduct was unintentional and none of BNY Mellon’s clients had lost money or assets as a result.

The size of the fine was decided by the tribunal after a three-day hearing. The largest sanction imposed by the regulator to date is the £6.5 million penalty PwC paid last year for misconduct in its audit of department store chain BHS.

The Financial Reporting Council said errors by KPMG when checking whether BNY Mellon had complied with rules on properly segregating client assets left customers and the broader financial system exposed to risk in the event of the bank’s failure. The watchdog also accused KPMG of “misinforming” regulators over BNY Mellon’s compliance with the rules on safeguarding client assets.

BNY Mellon was itself fined a record £126 million by the Financial Conduct Authority in 2015 for failing to comply with rules that required it to properly ringfence customer accounts at its London branch and in its international unit between 2007 and 2013.

KPMG has already been fined twice this year, receiving a £5 million penalty for "failing to exercise sufficient professional scepticism" during a 2009 audit of the Co-op Bank, and a £6 million penalty for a failed audit of motor insurer Equity Red Star. In 2018, it received a fine of £2 million over its work for retailer Ted Baker and a £3 million fine relating to its work for insurance software firm Quindell.

The accounting giant is also under investigation by the FRC for its work at collapsed government contractor Carillion, which was audited by the firm for 19 years, and has been hit by scandals in the US and South Africa. – Copyright The Financial Times Limited 2019