The UK’s accounting regulator has taken enforcement action against King & King and one of its long-standing partners for “widespread deficiencies” in their audits of companies linked to steel magnate Sanjeev Gupta.
Between 2018 and 2020, London-based King & King was appointed to carry out more than 140 audits of companies within the GFG Alliance, an informal grouping of companies linked to Gupta.
The GFG Alliance faced acute financial issues after the 2021 collapse of Greensill, and both companies have since been subject to an investigation by the UK’s Serious Fraud Office.
The Financial Reporting Council (FRC) said in an enforcement notice today that King & King took a “flawed and artificial approach” to ethical standards during its audits of four GFG companies, which resulted in “pervasive breaches across all audits”.
The firm also “failed to identify clear self interest threats arising from their reliance on revenue from GFG Alliance entities, compromising their independence and objectivity as auditors”, the FRC said.
The watchdog said King & King would pay a £52,000 fine and be barred from auditing companies that meet the FRC’s definition of “public interest entities” for five years, while partner Milankumar Patel was given a penalty of over £326,000, reflecting his personal earnings from that activity.
Andrew Twomey, acting deputy executive counsel at the FRC, said Patel and King & King’s failures “were particularly egregious”, and the action should “send a clear message to the audit community that this behaviour will not be tolerated”.
The firm’s 2019 review of Liberty Steel Newport in Wales was one of four audits highlighted by the regulator.
The FRC said Newport’s primary rolling steel mill generated losses of £16mn, but that those were offset by £21mn in profit from trading commodities. However, its trading business was not mentioned in financial statements and had several unusual features.
Financial information was retained by staff in Dubai and did not appear immediately accessible to Newport, while a separate Gupta-linked entity was involved in arranging or facilitating trades and Newport did not itself receive payment, the FRC said.
“It was unclear what Newport’s role in the transactions was, whether it was acting as an agent as opposed to a principal, and how its profit crystallised,” the notice said. King & King documentation said the trading arrangement would “compensate” for manufacturing losses, it added.
“These highly unusual features are indicative of possible fraudulent financial reporting in relation to revenue recognition and profitability,” the FRC said, yet the auditors did not question or challenge management on Newport’s accounting treatment of the trading business.
The FRC also said Patel failed to challenge management on “red flags” associated with Liberty Speciality Steels’ financial statements.
The South Yorkshire-based steel manufacturer had removed most of a £16.5mn environmental provision from its 2018 statements, which meant the company recorded £5mn in profit.
Though an audit manager at King & King initially raised concerns with management, Patel “expressly took ownership of the issue” after speaking with a GFG Alliance executive and did not pursue further action, the FRC said.
The enforcement notice also highlighted concerns over related party transactions in Scotland-based smelter operator Alvance British Aluminium’s 2019 financial statements, and reliance on other GFG group companies in Midlands-based Liberty Performance Steels’ 2020 filings.
It said the fees King & King generated from its work with GFG Alliance – equivalent to more than 40% of its income in the 2021 financial year – threatened the firm’s independence as an auditor.
At the same time, Patel’s personal remuneration “gave rise to significant self-interest threats which compromised [his] objectivity”, the watchdog said.
Patel’s status as a responsible individual has been withdrawn, and he is barred from performing statutory audit work for three years. King & King has been ordered not to accept any new appointments as auditor to high turnover companies and submit to a monitoring review.
The action follows a £2.89mn fine the FRC issued to PwC last year over its audit of defunct Wyelands Bank, which reflect the accounting giant’s failure to recognise the lender’s reliance on business with GFG Alliance companies.
The FRC has also been investigating Saffery, which audited Greensill between 2014 and 2019. In April, Greensill Capital’s administrators secured a £71mn settlement from the firm.
King & King and Patel did not respond when contacted by GTR. A GFG Alliance spokesperson declined to comment.
