KPMG in relation to the audit of the financial statements of Rolls-Royce Group

FRC launch investigation into KPMG in relation to the audit of the financial statements of Rolls-Royce Group

04 May 2017

PN 21/17

The Financial Reporting Council (FRC) has commenced an investigation under the Audit Enforcement Procedure into the conduct of KPMG Audit Plc, in relation to the audit of the financial statements of Rolls-Royce Group plc for the year ended 31 December 2010 and of Rolls-Royce Holdings plc for the years ended 31 December 2011 to 31 December 2013.

The decision to investigate follows the SFO announcement on 17 January 2017 of a Deferred Prosecution Agreement* (DPA) between the SFO and Rolls-Royce PLC which relates to offences including conspiracy to corrupt and a failure to prevent bribery. 

https://www.frc.org.uk/news/may-2017/frc-launch-investigation-into-kpmg-in-relation-to

Media Article:

Accounting watchdog to investigate KPMG over Rolls-Royce audit

FRC’s move follows Rolls-Royce’s deal with SFO to pay £671m to settle corruption allegations

The UK’s accounting watchdog has begun an investigation into KPMG’s audit of Rolls-Royce, after the engineering group settled a bribery case with the Serious Fraud Office earlier this year.

Rolls-Royce agreed in January to pay £671m in penalties to settle long-running corruption allegations, in a deferred prosecution agreement. The cost of the settlement coupled with the slide in the pound since the Brexit vote pushed the firm into a £4.6bn annual loss, the biggest in its history.

The Financial Reporting Council said it had started investigating KPMG’s conduct in relation to its audit of Rolls-Royce’s financial statements between 2010 and 2013.

Rolls-Royce calls its first staff AGM

KPMG said: “It is important that regulators acting in the public interest should review high profile issues. We will cooperate fully with the FRC’s investigation, which follows the SFO’s investigations into Rolls-Royce. We are confident in the quality of all the audit work we have completed for Rolls-Royce, including the 2010-13 period the FRC is considering.”

Rolls-Royce apologised at the high court in January after it was found to have paid bribes including a luxury car and millions of pounds’ worth of cash to middlemen to secure orders in Indonesia, Russia, China, Thailand, India and Nigeria.

The settlement was reached with investigators from the UK, US and Brazil, who started to examine the allegations five years ago.

It revealed the company’s use of middlemen over three decades. For example, the firm paid more than $36m (£28m) in Thailand between 1991 and 2005 to agents to help it win three contracts to supply Trent aero engines to Thai Airways.

Meanwhile, the Unite union celebrated a pay deal for Rolls-Royce’s Rotherham factory guaranteeing a minimum rise of 17% over three years that will be signed on Friday. Unite said the package, which will benefit about 120 staff below the level of management, was “one of the largest deals that Rolls-Royce has agreed in recent years”.

The union said the company had finally realised that pay rates in Rotherham were among the lowest across the engineering group, forcing workers at the south Yorkshire site, which makes single crystal turbine blades, to leave for better jobs.

Rolls-Royce held its annual meeting in Derby, where it employs 14,000 people, on Thursday. Its chief executive, Warren East, told shareholders that trading in the first few months of the year had met expectations and that the outlook for 2017 was unchanged.

East said: “At this early stage in the year we see no reason to change our expectations for profit and, importantly, cash flow for the year as a whole.

“We have some important transformation initiatives under way and, while we have made good progress in our cost-cutting and efficiency programmes, more needs to be done to ensure we drive sustainable margin improvements within the business.”

As in 2016, the engineering firm expects to make most of its profits in the second half of the year, and they are likely to be similar to last year.

The company has been slashing costs and is on track to hit its target of £200m annual savings by the end of 2017.

https://www.theguardian.com/business/2017/may/04/kpmg-rolls-royce-frc-sfo

Rolls-Royce Auditor KPMG Probed by U.K. Over Bribery Accounts

Rolls-Royce Holdings Plc’s bribery and corruption scandal has drawn in its departing auditor KPMG, which has become the target of a probe by the U.K.’s accounting regulator.

The Financial Reporting Council said it started an investigation into KPMG’s audits of Rolls-Royce’s earnings for 2010 through 2013, citing the engine maker’s deferred prosecution agreement over bribery and corruption allegations that was reached in January. KPMG said it will cooperate “fully” with the investigation, adding that it is “confident in the quality of all the audit work” performed for Rolls-Royce.

The probe stemming from allegations of bribes paid to win tenders comes at an awkward time for the British manufacturer. The company is hosting its annual shareholders meeting Thursday in Derby, England, as Chief Executive Officer Warren East seeks to show progress made in cutting costs and streamlining operations.

Rolls-Royce said Thursday that cash flow in the first half will be lower this year as it ramps up deliveries of its loss-making aircraft engines. The London-based company held onto an earnings outlook detailed in February but pleaded for patience, saying pretax profit before financing costs will be weighted to the second half similar to last year. Free cash flow in the first half will also be lower than in 2016 as the ramp up of engine deliveries and one-time charges eat into cash reserves.

“We have some important transformation initiatives underway and, while we have made good progress in our cost cutting and efficiency programs, more needs to be done,” East said in the statement.

Rolls said it is “on track” to deliver incremental savings in 2017 of between 80 million pounds ($103 million) and 110 million pounds. In addition, full-year sales will benefit by about 400 million pounds and pretax profit by 50 million pounds from current exchange rates.

Rolls-Royce in December appointed PricewaterhouseCoopers LLP to replace KPMG as the company’s auditors from 2018 as part of a transformation program to revive the engineering giant after a string of profit warnings. KPMG has acted as the engine-maker’s auditors for nearly three decades.

https://www.bloomberg.com/news/articles/2017-05-04/rolls-royce-auditor-kpmg-probed-by-u-k-over-bribery-accounts

Watchdog investigates Rolls-Royce accountants KPMG for failing to spot bribes

An investigation has been launched into the auditing of Rolls-Royce after accountants failed to flag up the engineering giant paying huge bribes to win contracts.

Auditors KPMG’s work examining Rolls’s accounts for 2010, 2011 and 2013 is being probed by regulators at the Financial Reporting Council.

The watchdog said the probe related to Rolls’s agreement with the Serious Fraud Office to pay £671m in fines to settle long-running investigations into allegations it used middlemen to make payments to land work all over the world.

Announcing the fines - which meant that Rolls avoided a criminal prosecution that could have meant it losing tens of billions of pounds in Government contracts - judge Sir Brian Leveson said in January that “truly vast, endemic” bribery and corruption took place inside the world-famous company for decades.

Lord Justice Leveson said the current management were not involved in the corruption but investigations were still ongoing into the work of several former senior executives. 

Sir John Rose, who headed Rolls for 15 years before leaving in 2011, has hired the lawyer who defended Barings “rogue trader” Nick Leeson as the SFO’s probe widens. 

The timing of the FRC's announcement is difficult for Rolls. The engineer is staging its annual general meeting at its Derby headquarters today, where investors are expected to ask tough questions about how the corrupt practices were allowed to occur.

Earlier this year Rolls - which is a separate company from the car maker of the same name - announced a record £4.6bn annual loss as current chief executive Warren East tries to turn the business around, stripping out costs and bloated management.

Updating on FTSE 100 group’s performance, he said: “At this early stage in the year we see no reason to change our expectations for profit and importantly cash flow for the year as a whole. We have some important transformation initiatives under way and, while we have made good progress in our cost cutting and efficiency programmes, more needs to be done to ensure we drive sustainable margin improvements within the business.”

A cost-cutting programme is on target to achieve savings of £200m a year by the end of 2017, Mr East added.

KPMG no longer audits Rolls, which swapped over to peer PwC in December, ending a 26-year relationship. The change of auditor was required under new corporate governance rules.

A spokesman for KPMG said: “It is important that regulators acting in the public interest should review high-profile issues. We will co-operate fully with the FRC’s investigation, which follows the SFO’s investigations into Rolls-Royce. We are confident in the quality of all the audit work we have completed for Rolls-Royce, including the 2010-2013 period the FRC is considering.”

http://www.telegraph.co.uk/business/2017/05/04/watchdog-probes-rolls-royce-accountants-kpmg-failing-spot-bribes/

KPMG’s audits of Rolls-Royce accounts probed by regulator

The Financial Reporting Council (FRC) will probe the accountancy giant’s oversight of Rolls-Royce’s financial statements covering four years.

It follows Rolls-Royce’s settlement of £671m with the Serious Fraud Office in January over corruption allegations.

KPMG said it was co-operating and was “confident in the quality” of its work.

The FRC said in a statement: “The FRC has commenced an investigation under the Audit Enforcement Procedure into the conduct of KPMG Audit Plc, in relation to the audit of the financial statements of Rolls-Royce Group plc for the year ended 31 December 2010 and of Rolls-Royce Holdings plc for the years ended 31 December 2011 to 31 December 2013.

“The decision to investigate follows the SFO announcement on 17 January 2017 of a Deferred Prosecution Agreement between the SFO and Rolls-Royce which relates to offences including conspiracy to corrupt and a failure to prevent bribery.”

The agreements relate to bribery and corruption scandals involving intermediaries in overseas markets such as Indonesia and China.

https://anticorruptiondigest.com/anti-corruption-news/2017/05/05/kpmgs-audits-of-rolls-royce-accounts-probed-by-regulator/