KPMG and related parties have been hit with penalties of more than £6 million ($11.1 million) for improper auditing of a UK underwriter that IAG sold in 2013 after suffering massive losses.

The UK Financial Reporting Council announced the penalties yesterday after finishing an investigation into how the auditors managed the books of Equity Syndicate Management (ESM), the trading name of Equity Red Star, a Lloyd’s motor underwriting syndicate.

The investigation covered the years from 2007 to 2009. It also looked into the provision of actuarial advice to ESM in relation to its reserving for the Lloyd’s syndicate over the same period.

IAG acquired Equity Red Star in December 2006, paying £570 million ($1.05 billion) for its parent company, Equity Insurance Group.

It sold Equity Red Star in 2013 to private equity company Aquiline Capital Partners for £87 million ($160.8 million) after failing to turn the business around despite significant capital injections – including about £365 million ($675 million) into its prior-year claims reserves for the unit in 2010.

The Financial Reporting Council says the sanctions were determined following a hearing last October, which preceded findings of misconduct made by an independent tribunal hearing in December 2017.

KPMG and Associate Partner Mark Taylor were fined £6 million and £100,000 ($184,904) respectively for not properly handling Equity Red Star’s financial statements in 2008 and 2009.

“The tribunal found that in both years insufficient enquiries were made regarding the claims file review process. Warning signs of deterioration in the syndicate’s claims reserves were not acted upon, and consequently there was insufficient evidence to provide an unqualified audit opinion,” the council says.

KPMG agreed also to undertake an additional internal review and report to the council on “certain aspects” of its audit last year of insurance undertakings, while a second partner will have to review Mr Taylor's audits until the end of next year.

Douglas Morgan, a former ESM director, was also penalised for misconduct arising from his handling of claims reviews carried out within the business. The council says that under his direction “claims reserves held by the syndicate [were] reduced to meet a pre-determined target”.

He has been excluded for two years from membership of the Chartered Institute of Management Accountants.