KPMG and one of its accountants have been handed a combined fine of £500,000 and a public rebuke for their role in the downfall of Independent Insurance, the former FTSE 100 darling whose fraud-riddled collapse caused more than 1,000 job losses.

Andrew John Sayers, KPMG's audit "engagement partner" for Independent Insurance, was personally fined £5,000 by the Joint Disciplinary Scheme (JDS), an independent accountancy investigative body set up by the Institute of Chartered Accounts in England and Wales.

The JDS found that Mr Sayers failed to check pledges from Independent which turned out to be "too good to be true". KPMG confirmed today that Mr Sayers would be paying his own fine.

As well as shouldering a penalty of £495,000, KPMG was ordered by the JDS to pay costs of £1.15 million.

Independent collapsed in 2000 after the debt-ridden company was unable to meet its payment obligations to customers. The Financial Services Authority, the City regulator, was forced to pay-out £357 million in compensation.

Following a 19-week criminal trial last year, Independent's founder and former chief executive, Michael Bright, was sentenced to seven years in jail.

His business colleagues, Philip Condon and Dennis Lomas - the company's former finance director - were also imprisoned for their role in the saga.

Today, in a damning indictment of both KPMG and Mr Sayers' behaviour, the JDS said statements by Independent Insurance should have caused "obvious suspicion".

It said that, in 1999, Independent had purchased reinsurance cover, known as stop-loss insurance, because of mounting insurance claims covering policies written over previous years. Buying this type of insurance would have meant Independent would have had to set aside less capital, benefiting profits.

The following year, according to the JDS, Independent told KPMG that it was buying more cover.

"The effect of this was that for a premium of £77 million, Independent would be able to turn a loss of £105 million into a profit of £22 million," JDS said in the report. "This was too good to be true.

Having been asked by KPMG to confirm that "stop-loss" reinsurance was in place at Independent, Mr Sayers did not, according to the JDS.

"The nature and validity of the stop loss insurance were fundamental to the validity of the audit," it said.

"It subsequently turned out that Independent had agreed to pledge £141 million as a condition of obtaining the stop loss. In addition, a different stop loss contract required the payment of a premium of £1.6 billion over four years.

"This completely changed the situation, the chief executive resigned, and Independent went into liquidation," it said.

"KPMG regrets that there were shortcomings in certain aspects of its audit of Independent and we accept that we could have done better," the accountancy firm said.

"However, it must be noted that the frauds which led to the collapse of Independent Insurance were perpetrated by a number of Independent’s senior directors who have been sentenced to substantial terms of imprisonment," it said.

"There is clear evidence that information was withheld from us. KPMG has to an extent been one of many victims of that fraud."

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