The penalties for financial wrongdoing just aren’t fit for purpose

There are times when you do a double take. So it was, with the headline: “KPMG to be fined £14m for forging documents over Carillion audit.”

To recap, Carillion, the outsourcing group, went down with £7bn of debts in January 2018. Three thousand people lost their jobs and hundreds of projects for its clients were badly affected, including hospitals, schools and roads.

Now, it transpires, staff at KPMG, the company’s auditor, forged documents and misled the regulator over audits at Carillion and another firm between 2014 and 2016. The Financial Reporting Council, which regulates accountants, is imposing the £14.4m fine along with a “severe reprimand” over the “extremely serious” misconduct of the firm’s former employees. It would have been more, £20m, but for KPMG’s cooperation (they alerted the regulator) and willingness to admit guilt.

That would have made it the largest such fine on record, ahead of the £15m handed out to Deloitte in 2020 over its audits of the software company Autonomy.

You’re expected to say that the punishment fits the crime – that’s what the FRC would like you to think. Except that the reduction on account of KPMG’s cooperation and willingness to admit guilt to my mind says they were bang to rights. As for the idea that these penalties act as a deterrent, how can that be, if Deloitte is penalised £15m and here’s KPMG two years later, being charged £20m?

It's a nonsense. I’ve written a book on the subject, Too Big to Jail: Inside HSBC, the Mexican Drug Cartels and the Greatest Banking Scandal of the Century, published on 9 June by Macmillan. Plugging apart, it looks at how HSBC was fined the largest amount in US history for laundering money for the Sinaloa drug cartel. The US Department of Justice wanted to bring criminal charges but, in the end, chose to fine. As for the claim about it being the biggest etc, well it was that alright, but to put the sum in context, it amounted to just five weeks of HSBC’s profits. Whilst HSBC admitted criminal conduct, nobody at KPMG has been accused of committing a crime.

In the KPMG case, the tribunal is deliberating over the penalties for the individuals involved, who are no longer at KPMG. The FRC is recommending an ex-partner, Peter Meehan, is likely to be banned from the accounting and auditing sector for 15 years and face a fine of at least £400,000. KPMG, to its credit, has said it will not be paying his fine or those of his fellow colleagues.

Meehan is 60 and was a partner for many years, during which he would have earned a considerable amount. Presumably, he can well afford the £400,000. As for being barred, he has reached what for many people these days is retirement age, plus, he is unlikely to need to work – and if he did, he could always get a job outside the profession.

In other words, tough as it appears it’s not unlikely to cause hardship and, back to the discouraging of others, will not make a difference. It’s not the FRC’s fault; the system, in which financial misdeeds are not treated the same, is wrong. Fining a wealthy accountancy firm, doing the same to one of its ex-senior partners, does not make anyone quake, doesn’t cause a would-be perpetrator of wrongdoing to pause and reconsider.

Three other KPMG staff – Alistair Wright, Richard Kitchen and Adam Bennett – were also each recommended for exclusion from the sector and a fine of £100,000. Pratik Paw, the junior member of the team, who was not yet a qualified accountant at the time, could face a four-year ban and a £50,000 fine. They and Meehan created false meeting minutes and retroactively edited spreadsheets, claiming they’d done the work when they hadn’t.

Another former KPMG auditor Stuart Smith accepted a £150,000 charge and a three-year suspension from the profession for his conduct over inspections of the auditing of software firm Regenersis, earlier this year.

The FRC found that Meehan, Wright, Kitchen and Bennett had “acted deliberately and dishonestly in the creation of false documents and the making of false representations”. Paw acted without integrity but not dishonestly.

David Turner, QC for Wright, said his client was “chastened, humbled [and] contrite” and pleaded that his fine should not exceed £50,000. Fionn Pilbrow, QC on behalf of Kitchen, said his client should be banned for no more than six years and that any fine should take into account mitigating factors, including the “career-crippling consequences” of the tribunal’s findings against him.

Yes, but there are other walks of life where if they had done something similar, they would have been facing something far worse.

Among accountants there will be disapproval at the KPMG employees’ behaviour and much shaking of heads. But there will be some, though, who will shrug dismissively and say they got caught, and continue misbehaving. Then we will have another round of fines and declarations of sorrow, accompanied by more headlines that bring us up short. And on it goes.

‘Too Big to Jail: Inside HSBC, the Mexican Drug Cartels and the Greatest Banking Scandal of the Century’ is published on 9 June by Macmillan