KPMG Under Investigation in U.K. Over Audits of BAE Systems Back to 1997

KPMG International’s U.K. unit is being investigated by Britain’s accounting regulator over its audits of BAE Systems Plc, the defense company that has agreed to plead guilty to bookkeeping irregularities.

The probe will cover KPMG’s audits from 1997 to 2007 and relates to commissions paid by London-based BAE through “any route to subsidiaries, agents and any connected companies,” the Financial Reporting Council said today on its website.

“The firm does not believe there has been any act of misconduct,” Mark Hamilton, a KPMG spokesman in London, said today in an e-mailed statement. “It will of course be cooperating fully.”

BAE, Europe’s largest defense company, in February agreed to pay almost $450 million to resolve bribery and fraud probes by U.S. prosecutors and the U.K.’s Serious Fraud Office. The company pleaded guilty in the U.S. and has agreed to plead guilty in the U.K. to accounting irregularities.

The investigation covers advice or tax work by KPMG related to commission payments from BAE as well as the “status, operation or disclosability” of entities tied to BAE known as Red Diamond Trading Ltd., Poseidon Trading Investments Ltd. and Novelmight Ltd., according to the statement. The probe is being conducted by the regulator’s Accountancy and Actuarial Discipline Board.

The accounting watchdog hasn’t indicated “that it has any basis for reaching a view that there is any material inaccuracy in any of the company’s accounts,” BAE spokeswoman Leonie Foster said today in a phone interview.

Guilty Plea

BAE agreed to pay $400 million to the U.S. and plead guilty to one count of conspiring to make false statements. The company also agreed to pay a 30 million-pound ($47 million) fine in the U.K. for failing to keep proper payment records.

The settlements resolved years of probes into BAE’s dealings in countries including Tanzania, South Africa and the Czech Republic. A settlement of the matter was delayed while two anti-arms groups sought unsuccessfully to block the deal.

The SFO scrapped its probe into BAE in 2006 over bribes allegedly paid to win deals in Saudi Arabia after then-Prime Minister Tony Blair said charges might harm relations between the two countries, posing a threat to national security.

The Financial Reporting Council earlier this month started separate investigations of PricewaterhouseCoopers LLP and Ernst & Young LLP over their reports on customers’ compliance with U.K. rules to protect client money. The probes relate to PwC’s work for JPMorgan Chase & Co.’s London unit and Ernst & Young’s reports for a U.K.-based unit of Lehman Brothers Holdings Inc.

To contact the reporter on this story: Erik Larson in London at elarson4@bloomberg.net.

To contact the editor responsible for this story: Anthony Aarons at aaarons@bloomberg.net.

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