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PwC and KPMG fined £10.5m for audit breaches in UK as pressure mounts to split up the “big 4” accountancy firms

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Previously much sought after, the "big four" have faced increasing criticisms over their roles in failed companies and misconduct all over the world

Report of the Presidential Tripartite Committee

PricewaterhouseCoopers LLP (PwC) and KPMG, two of the world’s largest “big 4” accounting firms were fined £4,550,000 and £6 million respectively for audit breaches in the United Kingdom.

On 13th June 2019, the Financial Reporting Council (FRC) UK’s regulator of auditors, accountants and actuaries, issued a Final Decision Notice under the Audit Enforcement Procedure to fine PwC £6,500,000 (discounted to £4,550,000 for admissions and early disposal) for breaches in regard to statutory audits of the financial statements of Redcentric PLC for the financial years ending 31 March 2015.

Redcentric PLC is a listed Managed IT Services provider in the UK.

Additionally Jaskamal Sarai and Arif Ahmad, two partners at PwC were fined £140,000 each and severely reprimanded.

KPMG on the other hand, was on 30th April 2019 reprimanded and fined £6 million for their misconduct, following FRC’s investigations in relation to the preparation and audit of Lloyd’s Syndicate 218 Report and Accounts for the years ended 31 December 2007, 2008 and 2009 and the provision of actuarial advice to Equity Syndicate Management Limited in relation to ESML’s reserving for Lloyds Syndicate 218 between 2007 and 2009.

The matter were referred to the FRC in 2012 and a formal complaint delivered to FRC in August 2016 following the conclusion of the FRC’s investigations. An independent tribunal made findings of misconduct following a hearing in December 2017 and sanctions were determined following a hearing in October 2018.

Mr. Edgar Isingoma, Country Leader & Partner, KPMG

KPMG Partner, Mark Taylor was also fined £100,000, severely reprimanded and agreed to the imposition of a requirement to have a second partner review of his audits until the end of 2020.    

Pressure mounts to split up UK’s “big four” accountancy firms to be split up

The fines come on the heels of pressure, in the UK to have the “big four” accountancy firms to be partially split up and forced to work with smaller rivals.

The big 4 are: PwC, EY, Deloitte and KPMG.

The House of Commons business, energy and industrial strategy select committee- a cross-party select committee who launched an inquiry into the future of audit in November 2018, recommended that UK’s Competition and Markets Authority (CMA) should break up the “big four” so as to avoid a repeat of a string of serious audit failures that have deeply undermined public confidence in the profession.

Although CMA resisted the calls for the breakup of the “big four” yet, it said, this option could be revisited within five years if the profession does not improve.

Instead, CMA said that in the face of “serious competition problems” in the sector, the UK government should pass new laws that force accounting giants to put “greater distance between their audit divisions and their more lucrative consulting operations, to prevent conflicts of interest”, according to the Financial Times.   

Worldwide, the much sought after “big four” have been dogged by several cases of malpractices and the attendant fines.

For example, on June 17th, it was announced that the U.S. Securities and Exchange Commission had fined KPMG $50 million for altering past audit work after getting stolen information about inspections of the firm to be conducted by the Public Company Accounting Oversight Board.     

This June, it was also reported that KPMG International, the firm’s global umbrella organization, was working with law firm Linklaters LLP on an independent investigation of KPMG Dubai’s work for Abraaj, the failed but once-highflying champion of emerging-markets investing. 

KPMG work unacceptable

A 2017/18 report by FRC, showed that 72% of audits done by the 8 biggest audit firms required no more than limited improvements compared with 78% in 2016/17.

The 8 are: KPMG, PwC, Deloitte, Ernst & Young and BDO GT, Mazars and Moore Stephens.

While FRC noted problems at all the “big 4” firms, it singled out KPMG for the consistent poor quality of its work.

“There has been an unacceptable deterioration in quality at one firm, KPMG. 50% of KPMG’s FTSE 350 audits required more than just limited improvements, compared to 35% in the previous year. As a result, KPMG will be subject to increased scrutiny by the FRC,” said the statement.

FRC further noted that overall quality of the KPMG audits inspected in the year, and “indeed the decline in quality over the past five years, is unacceptable and reflects badly on the action taken by the previous leadership, not just on the performance of front line teams.”  

In Uganda, KPMG was recently in the spotlight for taking two years to produce audit reports of the defunct Crane Bank for the period starting 1st January 2016 to 25th January 2017, despite being paid UGX921.7 by bank of Uganda for the job and other related works.

The audit was/is vital to providing clues to the whereabouts of UGX270 billion, out of the UGX478 billion that BoU claims it injected into Crane Bank as liquidity support, but the Auditor General could not trace.  

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Finance

Dfcu Bank confirms fraud; declines to give details

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Dfcu bank, has this evening confirmed that there was indeed fraud at the bank, but declined to divulge details of how much and who was involved, but said investigations were on going.

In a series of tweets, on their official twitter account (@dfcugroup), the bank said that “In May 2019, the Bank detected a case of fraud that was immediately reported to the police (CID HDQTRS GEF 604/2019) and investigations are ongoing.”

The bank which has been mum since the story was broken on Friday, went on to claim that the incident had “been grossly and maliciously misrepresented in an attempt to damage the reputation of the Bank, destabilise the banking sector and the economy in general,” but offered nor further detail on what had been misrepresented.

Several media houses that broke the story have reported that up to $2.6m was lost to hackers who breached the bank’s system, citing unnamed bank sources.

“The Bank takes these malicious reports seriously and reserves the right to take legal action as well as to refer the authors and disseminators to the relevant law enforcement authorities,” the bank threatened in one of the tweets.

The thread of tweets issued by dfcu Bank this evening

Dfcu Bank is one of the domestic systemically important banks (DSIBs) together with Stanbic Bank, Standard and Chartered Bank and fraud at the institution would be of national interest.

DSIB is a term used to describe banks whose business failures may widely impact the economy. These are deemed too big to fail because if their broad business networks across the economy.

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U.K. Regulator Fines Deloitte £6.5 Million Over Audit Misconduct

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The Financial Reporting Council, Britain’s regulator for accounting and audit, on Thursday, July 4th 2019, penalized and reprimanded Deloitte LLP, the global auditing giant, and one of its partners for shortfalls in its audits of a subsidiary of a U.K outsourcing firm, Serco Group PLC.

Deloitte was charged £6.5 million ($8.2 million) in addition to a “severe” reprimand. The fine was however reduced to £4.225 million as part of the firm’s settlement. Deloitte was also made to pay £300,000 toward the costs of the investigation.

Deloitte’s audit-engagement partner, a one, Helen George was fined £97,000 in respect to the audit of Serco Geografix’s 2011 financial statements.

In addition, Deloitte was made to arrange for all its audit staff to “undergo a training programme (designed to the satisfaction of the FRC) aimed at improving the behaviour that is the subject of the Misconduct.”

“Deloitte and Ms. George failed to act in accordance with the fundamental principle of professional competence and due care,” the FRC said in a statement.

The fine relates to three offences of fraud and two of false accounting committed between 2010 and 2013 related to the reporting to the UK Ministry of Justice (MoJ) of the levels of profitability of Serco’s Electronic Monitoring (EM) contract.

On July 3rd 2019, following an admission of responsibility and a Deferred Prosecution Agreement (DPA) with the UK Serious Fraud Office (SFO), Serco Geografix Ltd (SGL) was also fined £19.2m together with £3.7m related to the SFO’s investigation costs. The fine reflects a discount of 50% as a result of Serco’s self-reporting, as well as its significant and substantial cooperation with the investigation. Additionally, Serco was made to compensate the UK Government in respect of the offences as part of a £70m settlement paid by Serco in December 2013.

The Financial Reporting Council has taken various actions against several audit firms and companies’ internal audit teams in recent months.   The FRC in their 2017/18 said that 72% of audits done by the 8 biggest audit firms required no more than limited improvements compared with 78% in 2016/17.

“We recognize and regret that our audit work on Serco Geografix Limited in 2011 and 2012 was below the professional standards expected of us,” a Deloitte spokeswoman said. The company said its quality processes have evolved since the audits in question were performed. “We have also specifically agreed with the FRC certain actions focused on learning lessons from the shortcomings in this audit work,” the Deloitte spokeswoman said, according to the Wall Street Journal.

Pressure mounts to split up the “big 4” accountancy firms over substandard work and conflict of interest

The Financial Reporting Council has taken various actions against several audit firms and companies’ internal audit teams in recent months.   

In June this year for example, FRC also fined PricewaterhouseCoopers LLP (PwC) and KPMG, two of the world’s largest “big 4” accounting firms £4,550,000 and £6 million respectively for audit breaches in the United Kingdom.

Amidst the improprieties, there is pressure mounting in the UK to split up the “big four” accountancy firms-  PwC, EY, Deloitte and KPMG.

The House of Commons business, energy and industrial strategy select committee- in November 2018, recommended that UK’s Competition and Markets Authority (CMA) should break up the “big four” so as to avoid a repeat of a string of serious audit failures that have deeply undermined public confidence in the profession.

Although CMA resisted the calls for the breakup of the “big four” yet, it said, this option could be revisited within five years if the profession does not improve.

The CMA instead said that in the face of “serious competition problems” in the sector, the UK government should pass new laws that force accounting giants to put “greater distance between their audit divisions and their more lucrative consulting operations, to prevent conflicts of interest”, according to the Financial Times.     

The FRC in their 2017/18 said that 72% of audits done by the 8 biggest audit firms required no more than limited improvements compared with 78% in 2016/17.

The 8 are: KPMG, PwC, Deloitte, Ernst & Young and BDO GT, Mazars and Moore Stephens.

While FRC noted problems at all the “big 4” firms, it singled out KPMG for the consistent poor quality of its work.  

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Gov’t ready to shake down BoU- Finance Minister

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COSASE and the Presidential Tripartite Committee have recommended a shakedown of BoU and the legal regime setting it up

After a long wait, the Minister of Finance, Planning and Economic Development (MoFPED) Hon. Matia Kasaija, has said that Government is ready to take action on the recommendations of Parliament on Bank of Uganda.

Mr. Kasaija was today quoted by Daily Monitor, Uganda’s leading independent daily saying that after the Parliamentary Public Accounts Committee on Statutory Authorities and State Enterprises (PAC-COSASE) made their recommendations, following a lengthy probe, and parliament had discussed and adopted the report, he had tasked the central bank to examine the findings and recommendations of the COSASE report and make a report to him, showing what actions they would take internally.

“We are moving, but I cannot give you the whole detail. We have received a report from Bank of Uganda showing the actions they have taken. But I cannot give you details on these actions too. The report was sent to me about three days ago,” Mr Kasaija is quoted, as having told Daily Monitor in a telephone interview.

The Hon Abdu Katuntu COSASE which faulted Bank of Uganda for mismanaging the takeover and sale of seven defunct banks, had among others recommended an amendment of critical clauses in the BoU Act as well as holding several BoU officials criminally liable.

Kasaija’s comments come on the back of another recently leaked Confidential Report of the Presidential Tripartite Committee to the President that also recommended an “urgent and comprehensive review” of what it believes is an archaic “legal regime governing the Bank of Uganda.”

“The Bank of Uganda Act Cap 51 was last amended in 1993, two years before the promulgation of the 1995 Constitution of Uganda. In the case of the Bank of Uganda by-laws established under Statutory Instrument 51-1, the situation is even worse as they were passed in 1968 and continue to be applied despite being inconsistent with the Constitution in some important respects such as the authority of the Governor versus the authority of the Board,” reads part of a leaked Confidential Report of the Presidential Tripartite Committee to the President.

The committee recommended a “splitting or separation of the functions of the Governor and the Chairperson of the Board especially with regard to administrative matters”, noting that “most of the problems caused as a result of the Governor’s decision could have been avoided if the two roles were separate with no opportunity for the Governor to function as both Board and Chief Executive Officer.”

The Committee also recommended that a new additional position of Deputy Governor be created to unburden the governor, who they said was “too overloaded in terms of responsibilities” some of which risked “exposing the position of Governor to unnecessary controversies.”

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