The second largest accountancy practice in the State, KPMG, has received an unprecedented reprimand over its audit of a subsidiary of Northern engineering group Powerscreen International. The work by KPMG and its audit partner, Mr Saunders Graham, was condemned as falling below the standard expected "in terms of efficiency and competence".

KPMG and Mr Graham, who was at that time an audit partner with the firm based in Belfast, failed to discover a £47 million sterling (€74 million) black hole at Matbro, the British subsidiary of Powerscreen in 1997, which subsequently led to an investigation by the British Serious Fraud Office into the affairs of the company.

The issue was particularly contentious because the the shortfall was announced just over a month after Powerscreen raised £18 million sterling through the placing of three million shares and less than three months after the group had announced interim profits of £23.6 million.

The reprimand against KPMG and Mr Graham, who has since left KPMG, comes after a two and a half year investigation by the Institute of Chartered Accountants in Ireland under its disciplinary procedure. KPMG has also been ordered to pay €430,000 towards the cost of the inquiry.

KPMG has accepted the findings of the inquiry - comprising former Law Society chairman Mr Laurence Shields and Mr James Gemmell, a Scottish accountant practising in London.

"The partnership accepts that the work, in this particular case, fell below its own rigorous standards," KPMG said yesterday in a statement.

The ICAI inquiry completed its report at the end of June. KPMG and Mr Graham were told of the findings on July 1st and had 21 days in which to appeal. No appeal was made.

The committee of inquiry was formed to examine the conduct of members and member firms in relation to Powerscreen International. It has had to suspend its work on the Powerscreen/Matbro case in relation to other members of the association because of ongoing proceedings in the UK courts.

The inquiry found that the auditor failed to get corroboration of management explanations on issues in relation to the audit and that the company and its then partner used "inadequate application of professional scepticism during the course of the audit".

The ICAI findings against the firm took into account that Mr Graham, as the "audit engagement partner", had the ultimate responsibility for the conduct of the audit but said there should have been more documentation on the audit files in relation to the communication of significant issues to Matbro management and the audit committee and the identification and treatment of late adjustments to the firm's financial statements.

KPMG said that, in common with the profession as a whole, the firm had adopted additional procedures "to improve the prospect of detection by auditors of the types of serious accounting irregularities that occurred within Matbro".

The ICAI accepted KPMG's statement that it had no part in the raising of the £18 million sterling in the placing following the interim figures.