The UK's accounting watchdog has fined and temporarily banned a small audit firm for 'egregious' failures and 'widespread deficiencies' in its work for companies within Sanjeev Gupta's metals empire.
Penalties Imposed
King & King and its managing partner Milankumar Patel have been fined a total of £378,184, received a 'severe reprimand', and face serious restrictions on audit work after a four-year investigation by the Financial Reporting Council (FRC). The watchdog stated that the six-partner firm had 'failed to identify clear self-interest' when it conducted more than 140 audits of GFG Alliance companies between 2018 and 2020, including Liberty Specialty Steels, Alvance British Aluminium, Liberty Steel Newport, and Liberty Performance Steels.
Fee Dependency
King & King, whose main office is located above shops on London's Regent Street, relied heavily on fees from GFG Alliance companies, which constituted nearly 41% of its revenues in 2021. The FRC said: 'This led Mr Patel and King & King to take a flawed and artificial approach to the ethical standards, resulting in pervasive breaches across all audits. They also failed to meet key audit requirements, including planning and risk assessment, income and expense recognition, going concern, and financial statement disclosures.'
Regulatory Context
Auditors are generally prohibited from taking more than 15% of their revenues from a single client. The FRC has since updated its rules to clarify that the revenue cap applies to 'a collection of entities with the same beneficial owner or controlling party'.
Broader Scandal
Gupta's GFG Alliance has been grappling with the fallout from the collapse of its former lender, Greensill Capital, in 2021. Greensill, founded by Australian entrepreneur Lex Greensill, collapsed amid concerns over billions of pounds in risky loans to GFG companies, including £400m via the coronavirus large business interruption loan scheme, which had an 80% government guarantee. Gupta's companies reportedly owed Greensill £3.6bn at the time of its collapse.
GFG Alliance is also under investigation by the UK's Serious Fraud Office for 'suspected fraud, fraudulent trading and money laundering'. GFG has denied any wrongdoing and stated it will cooperate with the SFO.
Official Comment
Andrew Twomey, acting deputy executive counsel at the FRC, commented: 'It is paramount that statutory audits are performed with objectivity, independence and free from self-interest. The failures by Mr Patel and King & King to meet these requirements were particularly egregious. The widespread deficiencies across all the audits were a symptom of King & King's and Mr Patel's fee dependency on the GFG entities. The serious but commensurate sanctions, which include disgorgement of fees and prohibitions on Mr Patel performing future audits, send a clear message to the audit community that this behaviour will not be tolerated.'
GFG and King & King did not immediately respond to requests for comment.
