Released June 25th 2008
Released June 25th 2008
JOINT DISCIPLINARY SCHEME
PRESS NOTICE
INDEPENDENT INSURANCE GROUP
· Fines totalling £500,000 imposed on KPMG and engagement partner Andrew John Sayers FCA.
· KPMG and Mr Sayers reprimanded for their work on the 2000 audit of Independent when they accepted that loss could be turned to profit by using stop loss insurance which was too good to be true.
· KPMG ordered to pay costs of £1.15 million.
Attached hereto is a Background Note containing further information; in order to access the Report of the Joint Disciplinary Tribunal, please click onto “Tribunal Report”
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BACKGROUND NOTE
Introduction
The attached Report by an Accountants’ Joint Disciplinary Tribunal (“JDT”) is published on 25 June 2008. The Report considers Complaints against KPMG, and against a partner Mr Andrew John Sayers FCA (“Mr Sayers”) (collectively referred to as “the Respondents”) in relation to the audit of Independent Insurance Group in 2000. The Complaints are appended to the Report of the JDT.
There follow some questions and answers which you may find of assistance.
In a nutshell, what happened at Independent?
Independent was a publicly quoted general insurance company. By its nature, insurance involves the acceptance of risks and the receipt of premiums in year one, with the claims arising from the risks not likely to be paid until future years.
In computing the amount of provision which needs to be made against such claims (the provision reduces the amount of profit), insurance companies look at both historical and current data.
During 1999, claims from insurance written by Independent in 1997 and earlier years increased in value. In order to protect itself from further deterioration in its position, Independent purchased “stop loss” insurance. One of the effects of stop loss is to enable the amount of provision to be smaller. It therefore has a beneficial effect on profit.
During 2000, claims for past years continued to increase. In January 2001, KPMG, the auditor of Independent was informed that further stop loss was being sought to extend the cover put in place in 1999. The effect of this was that for a premium of £77 million, Independent would be able to turn a LOSS of £105 million into a PROFIT of £22 million.
This was too good to be true. The company underwriting the stop loss insurance (“the reinsurers”) appeared certain to lose money. It gave rise to an obvious suspicion that there may be more to the stop loss insurance than KPMG was being told.
The KPMG audit engagement partner, Mr Sayers, was advised by the KPMG concurring partner to confirm the stop loss terms directly with the reinsurers. For some reason (no record of his thinking was made by him) Mr Sayers decided not to do this. Independent’s reporting actuaries Watson Wyatt told Mr Sayers that they “did not understand why the reinsurers were writing these contracts when they appeared to be obviously loss making”. The nature and validity of the stop loss insurance were fundamental to the audit.
It subsequently turned out that Independent had agreed to pledge £141 million as a condition of obtaining the stop loss; and there were other agreements which limited the liability of the reinsurers and sought to pass on the risk from the reinsurer to a subsidiary of Independent. In addition, a different stop loss contract required the payment of a premium of £1.6 billion over four years.
This completely changed the situation, the Chief Executive resigned, and Independent went into liquidation.
What penalties have been imposed on the Respondents?
(a) Fines totalling £½ million have been imposed on the Respondents as follows:
KPMG is fined £495,000
Mr Sayers is fined £5,000
(b) The Respondents have both been reprimanded
(c) KPMG has been ordered to pay costs of £1.15 million.
The Report refers to a “Carecraft Agreement” – what is this?
This is a procedure which was first developed in company directors disqualification cases (“Carecraft Construction Co Limited” was the name of the case in which the principles were first laid down). What happens is that the Executive Counsel (see below) and the Respondents agree Complaints which the latter will admit, together with, normally, a Statement of Facts. The penalty and costs are recommended to the JDT by the parties – but it is entirely a matter for the JDT whether or not to accept those recommendations.
In this, as in any case where a Carecraft Agreement is made, the considerable costs of a contested hearing were avoided.
Have any other investigations been carried out?
Yes. The Serious Fraud Office conducted a criminal investigation into Independent. On 23 October 2007 at Southwark Crown Court, Mr Michael John Bright, the former Chief Executive of Independent, Mr Philip John Condon, the former deputy managing Director, and Mr Dennis Lomas FCA, the former Finance Director, were all found guilty of serious offences of fraud arising from their involvement in Independent. Mr Bright was sentenced to seven years imprisonment and disqualified from being a company director for 12 years; Mr Lomas was sentenced to four years imprisonment and disqualified from being a company director for 10 years; and Mr Condon was sentenced to three years imprisonment and also disqualified from being a company director for 10 years.
Has action been taken against any other accountants?
Mention has been made above of Mr Dennis Lomas. Now that he has been convicted on indictment of serious offences of fraud, he will be dealt with by his own professional body, the Institute of Chartered Accountants in England and Wales (“the ICAEW”).
What is the JDS?
The rôle of the JDS is to promote the highest possible standards of professional and business conduct, efficiency and competence by chartered accountants.
The JDS conducts independent investigations into the work and conduct of chartered accountants where this has given rise to public concern. The sponsors of the Scheme are the ICAEW and the Institute of Chartered Accountants of Scotland.
Cases are investigated by the Executive Counsel, Christopher Dickson, a barrister employed by the Scheme. Where he finds that work or conduct appears to have fallen below acceptable standards, he lays Complaints before a JDT headed by a QC or a retired judge. It is for the JDT to decide, on the basis of the evidence presented, whether the Complaints have been substantiated; and if so, what penalty should be imposed. Members and Member Firms have a right of appeal to an Appeal Tribunal, normally headed by a retired judge. Appointments to JDTs and Appeal Tribunals are made by the Executive Committee, the governing body of the JDS, acting independently of the Executive Counsel.
Who were the Members of the Tribunal?
Mr Adrian Brunner QC, the Chairman, is a Member of the Bar of England and Wales in independent practice. Mr Jock Worsley FCA is a former President of the ICAEW; he currently holds a number of appointments including Complaints Commissioner of the Financial Services Authority (“FSA”). Mr Geoffrey Wallwork FCA was, until his retirement, a partner in Grant Thornton, the international firm of Chartered Accountants.