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Rolls-Royce Accounting Firm Probed over Bribery Charges

19 May 2017, 17:19 CET

Accounting firm KPMG is being investigated by the Financial Reporting Council relating to the Rolls-Royce audits from 2010 to 2013.

The investigation ends at that point because KPMG reported to shareholders the risk of bribery at that time. The Financial Reporting Council investigation follows the deal Rolls-Royce has with Serious Fraud Office to pay £671 million in January 2017 to settle corruption charges and a deferred prosecution agreement.

What Rolls-Royce Did

Rolls-Royce publicly apologised for paying bribes worth millions of dollars to secure orders in nations like Nigeria, India, Russia, and China. They even gave away cars to secure orders. The bribes to middlemen go back at least three decades. Rolls-Royce was found to have paid more than 28 million pounds in bribes from 1991 to 2005 to secure contracts to supply engines to Thai Airways. The tens of millions of dollars in bribes are thought to have secured the company more than 250 million pounds in business. And KPMG didn't catch it, hence the fines. Rolls-Royce changed its method of booking fees from risk-sharing partnerships in 2014 after a review by the Financial Reporting Council.

Why KPMG Didn't Catch It

Judge Brian Leveson of the SFO case against Rolls-Royce said the issue was not specifically due to KPMG but rather Rolls-Royce not giving them the complete picture. The United States Department of Justice found that the Rolls-Royce bribes were equivalent to 0.029 percent of the group's revenues during the time frame of the investigation. The relatively low percentage of money involved may explain why it was missed.

The Impact to KPMG

This is only the latest scandal to hit KPMG. Not long before, KPMG had to fire six American employees, including the head of its US audit practice, for improperly getting advanced warnings about inspections by the U.S. watchdog. The corruption settlement, along with other allegations of impropriety and the declining pound, caused KPMG to report its largest loss ever, 4.6 billion pounds. The blow to its reputation will likely to hurt its business, possibly causing it to drop to the second tier of accounting firms. Note, however, that most small business accountants London are reputable.

Regulatory Changes in Response to These Events

New rules go into effect in 2018 that force Rolls-Royce to report losses on engine sales up front rather than mitigate it by profit on the service contract. If that method of reporting had been in effect, Rolls-Royce's losses would have been much higher than the 4.6 billion pounds reported in the media.

KPMG has been the auditor of Rolls-Royce since 1990. Rolls-Royce is changing its auditor to Price Waterhouse Coopers, not because of the KPMG scandal, but because of laws passed in 2016 that require big companies to change auditors every twenty years.

The Financial Reporting Council is investigating KPMG for not finding Rolls-Royce's major bribes and patterns of corruption, though the FRC is cracking down much harder on all large accounting firms. KPMG will likely face more penalties while Rolls-Royce is facing major losses due to the penalties it has already paid.

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