KPMG fined £1.5m over fraud failure

http://www.thisismoney.co.uk/investing-and-markets/article.html?in_article_id=443586&in_page_id=3

Robert Lea, Evening Standard
25 June 2008, 9:29am

A £1.5m-a-year high-flying auditor and his firm KPMG have been fingered for failing to spot the massive Independent Insurance fraud, one of the largest financial scandals of the last decade which cost hundreds of jobs and left hundreds of thousands of investors out of pocket.

KPMG and partner Andrew Sayers have been hit with penalties totalling £1.65m for their failure to alert investors to the fraudulent trading of the bosses of what was - before its collapse in 2001 - one of Britain's largest and best-regarded insurance companies.
In a ruling out today from the Accountants Joint Disciplinary Tribunal, KPMG and Sayers were found to have 'seriously' fallen short of their duties as auditors, allowing Independent's subsequentlyconvicted management to hoodwink employees, advisers, financial markets and shareholders.

Independent chief executive Michael Bright was convicted of fraud and sent down last November for seven years. Finance director Dennis Lomas and deputy managing director Philip Condon were jailed for four and three years respectively.
But the role of KPMG in not smoking out Bright's dishonesty has now been laid bare. The tribunal findings reveal that in signing off Independent's 2000 accounts, KPMG gave a clean bill of health for so-called stop-loss reinsurance contracts which hid £105m of losses on escalating claims against the company, instead allowing it to book a £22m profit.
The firm gave the accounts an unqualified audit report, despite having serious reservations about the stop-loss contract being written on uncommercial terms.
Sayers took advice from four fellow partners over whether he should contact the third-party reinsurers over the contract. Only one partner suggested he should, but Sayers ignored his advice and instead relied on Bright's story that the reinsurers had given Independent preferential terms because of long-standing relationships.

The contract was a fiction, and just six weeks after KPMG signed off those accounts in March 2001, Bright resigned. The company went into liquidation the following June.
'KPMG's and Mr Sayers' conduct in relation to the audit of of the stop-loss contract fell seriously below the appropriate standard,' said tribunal chairman Adrian Brunner QC.
'Having identified an apparent lack of commercial rationale for the stop-loss policies and in the knowledge of the highly material effect on the financial statements, an auditor of good standing should not have placed such complete reliance on management representations.'
Sayers remains a partner at KPMG which said it regretted the 'shortcomings' of its audit work.
Two years ago KPMG paid an undisclosed sum in compensation to Independent's liquidators.