FRC begins probe of KPMG and its Rolls-Royce audit

8 May 2017

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The Financial Reporting Council (FRC) has commenced an investigation under its audit enforcement procedure into the conduct of KPMG, in relation to its audit of Rolls-Royce's financial statements from 2010 to 2013.

The FRC's investigation follows an announcement in January that a Deferred Prosecution Agreement (DPA) had been reached between the Serious Fraud Office (SFO) and the engineering company. This related to offences Rolls-Royce had admitted to which included conspiracy to corrupt and a failure to prevent bribery.

The SFO entered into a significant DPA with Rolls-Royce PLC following its approval by Sir Brian Leveson, President of the Queen’s Bench division. This came after a four-year investigation into bribery and corruption at the company and which continued into the conduct of individuals.

A DPA means that a company can account to a court for conduct without suffering the full consequences of a criminal conviction, which might include international disbarment from competition for public contracts.

Under the DPA Rolls-Royce agreed to pay £497.25m, plus interest, and the SFO’s costs of £13m. The indictment brought by the SFO covered  12 counts of conspiracy to corrupt, false accounting and failure to prevent bribery.

The conduct spanned three decades and involved Rolls-Royce’s Civil Aerospace and Defence Aerospace businesses and its former Energy business and related to the sale of aero engines, energy systems and related services. The conduct covered by the UK DPA took place across seven jurisdictions: Indonesia, Thailand, India, Russia, Nigeria, China and Malaysia.

The Judge in January said that the DPA reflected the gravity of the conduct, the full cooperation of Rolls-Royce in the investigation, and the programme of corporate reform and compliance put in place by new leadership at the top of the company since the offences were committed. If Rolls- Royce failed to honour the conditions of the DPA prosecution proceedings against the could resume.

The FRC will now investigate if KPMG breached any of its requirements as a statutory auditor when it audited the accounts of Rolls-Royce at a time when there was wrong-doing occurring at the company.

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