KPMG to be probed over BAE accountancy

Auditor-auditors prep microscope, eye corporate ass

UK-headquartered but nowadays US-centred arms multinational BAE Systems faces negative headlines once again, as it has been announced that accountancy firm KPMG is to be investigated by UK regulators regarding its past performance as BAE's auditor.

The Accountancy and Actuarial Discipline Board, the UK regulator covering public-interest cases within the accountancy sector, announced that KPMG would be probed yesterday. According to the AADB:

The Accountancy and Actuarial Discipline Board has begun an investigation under its Accountancy Scheme into the conduct of KPMG Audit plc as auditors to BAE Systems plc.

The scope of the investigation is as follows:

“The conduct of Members and Member Firms in relation to:

The audits of British Aerospace / BAE Systems Group plc and any of its subsidiaries by KPMG from 1997-2007 in relation to the commissions paid by BAE through any route to subsidiaries, agents and any connected companies. Also any other professional advice, consultancy or tax work provided to BAE by KPMG between those dates in respect of (i) commission payments paid by BAE and (ii) the status, operation or disclosability of Red Diamond Trading Ltd., Poseidon Trading Investments Ltd. and Novelmight Ltd.”

BAE earlier this year reached agreements with US and UK investigators who had been probing the company's dealings in various countries including Tanzania, Hungary, the Czech Republic and (most significantly) Saudi Arabia.

In District of Columbia court filings which went uncontested by BAE, supplied to the Register by the US Department of Justice, it was stated that:

BAE Systems regularly retained what it referred to as 'marketing advisors'... BAE Systems took steps to conceal its relationships with certain such advisors and its undisclosed payments to them. For example, BAE Systems paid certain of its advisors through various offshore shell entities... in certain situations there was a high probability that part of the payments would be used in order to ensure that BAE Systems was favoured in the foreign government decisions... BAE Systems also at times obfuscated and failed to record the key reasons for the suitability of an advisor or to document any work performed by the advisor... relevant materials were maintained by secretive legal trusts in offshore locations.

It was agreed that BAE had failed to abide by a promise it had made to the US government in 2000 (and confirmed in 2002) that the company's non-US businesses would "comply with the anti-bribery provisions of the [US] Foreign and Corrupt Practices Act as if those provisions applied to us". The company paid a $400m fine in the US, and a £30m one in the UK, pleading guilty in Britain to a charge of breach of duty to keep accounting records with respect to a radar deal in Tanzania.

BAE's relationship with the US government is vitally important, as the firm has for a long time been moving out of Britain and across the Atlantic. The company now employs many more Americans than it does Brits, its extensive US acquisitions having been counterbalanced by continual downsizing of its UK workforce over the past two decades.

Blighty remains one of the company's so-called "home markets", however, and is certainly the one where it exerts most political clout. A long-running probe by the UK Serious Fraud Office into BAE's Saudi dealings was controversially closed down on the direct orders of then Prime Minister Tony Blair in a move later slammed by British judges as "abject surrender".

BAE would have hoped that the agreements and fines earlier this year would finally draw a line under the long saga of official investigations into its offshore dealings. However, the probe into KPMG's auditing of the company's books - and the specific naming by the AADB of Red Diamond, Poseidon Trading and Novelmight - would seem to augur further pain ahead for the arms behemoth.

BAE told the Reg this morning:

The Company notes that the AADB has today announced an investigation of KPMG's past audits of the company up to 2007. The AADB has not indicated to BAE Systems that it has any basis for reaching a view that there is any material inaccuracy in any of the Company's accounts.

KPMG for its part said the "the firm does not believe there has been any act of misconduct. It will of course be cooperating fully with the AADB." ®