12 October, 2023 by Michael O’Dwyer
KPMG has been fined a record £21mn by UK regulators for “textbook” failures in its auditing of Carillion, the government contractor whose collapse in 2018 sparked political controversy and calls for an overhaul of the accounting profession.
The Financial Reporting Council said on Thursday that it had found an “unusually large number of breaches” of audit standards, which meant that Carillion “was not subject to rigorous, comprehensive, and reliable audits in the three years leading up to its demise”.
The fine, which is the largest imposed on an audit firm by the FRC, was reduced from £30mn to reflect KPMG’s co-operation with the five-and-a-half year investigation. The Big Four firm was ordered to pay £5.3mn in costs.
KPMG’s UK chief executive Jon Holt said the findings were “damning” and that he “simply cannot defend the work that we did on Carillion”.
Carillion, an outsourcing and construction group operating in the UK and Middle East, announced more than £1bn of writedowns in 2017, months after KPMG gave an unqualified audit opinion on its accounts.
It had liabilities of £7bn and just £29mn in cash when it went into liquidation, fuelling calls for a shake-up of UK audit and corporate governance regulation and prompting an MP to say he would not hire KPMG to audit “the contents of my fridge”.
Its collapse endangered thousands of jobs and jeopardised the provision of school meals and the cleaning of hospitals.
“The collapse of Carillion had a significant and painful impact on employees, pensioners, investors, critical infrastructure projects, local communities and taxpayers,” said FRC chief executive Richard Moriarty.
“Our investigation concludes this was a textbook case study in failure. Important safeguards that should have been present were seriously lacking,” he said.
The FRC found “significant and serious breaches” in KPMG’s work from 2014 to 2017 and said there were also failings in the 2013 audit.
It found that in 2016 the firm’s work to assess Carillion as a going concern was “seriously deficient” and that this was compounded by breaches of ethical standards relating to “objectivity, independence, and integrity”.
KPMG “failed to respond to numerous indicators that Carillion’s core operations were lossmaking and that it was reliant on short term and unsustainable measures to support its cash flows” the FRC said on Thursday.
KPMG … had not scrutinised the directors’ judgments even when these seemed “unreasonable”.FRC
The regulator said the firm had failed to gather enough evidence to conclude that the accounts were true and fair.
In a number of instances KPMG had simply “accept[ed] the presentation of financial information that suited Carillion’s management”, and had not scrutinised the directors’ judgments even when these seemed “unreasonable”, the watchdog said.
It added that some audit procedures were not completed until more than six weeks after the audit had been signed off, and that KPMG’s records were “unreliable and, in some cases, misleading”.
Peter Meehan, the former KPMG partner who led the audit from 2014 onwards was fined £350,000 and banned from the profession for 10 years, to run concurrently with an earlier exclusion from the industry. Darren Turner, who led the audit in 2013, was handed a £70,000 penalty. Their fines were reduced from £500,000 and £100,000 respectively. Meehan and Turner declined to comment.
KPMG chief Holt said the firm’s work had been “very bad, over an extended period”.
“In many areas, some of our former partners and employees simply didn’t do their job properly,” he said. The firm had made improvements to avoid any repeat, he added.
The £21mn fine is equivalent to the pay of about 29 KPMG’s roughly 500 partners, which averaged £717,000 last year.
The Carillion case is the 16th since 2018 in which the FRC or an industry tribunal has imposed sanctions against KPMG. It takes the total penalties and costs levied against the firm in that time to more than £95mn — far more than its rivals.
KPMG had already been fined £14.4mn last year for deliberately misleading the accounting regulator during inspections of its audits of Carillion and another UK company.
In February, KPMG paid an undisclosed sum to settle a separate £1.3bn legal claim by the company’s liquidators, who claimed the auditor had missed “red flags” resulting in the group’s accounts being misstated.
Carillion’s former chief executive Richard Howson was this month disqualified as a director of UK companies for eight years while one of its former finance chiefs, Zafar Khan, has been barred for 11 years.
The government is seeking the disqualification of several other former directors in court proceedings.
Howson and Khan were among three former Carillion directors fined by the Financial Conduct Authority last year for publishing “misleadingly positive statements” about the group’s finances. KPMG claimed previously Carillion’s management had concealed information from its auditors doctored financial documents to make them more “audit friendly”.
© The Financial Times Limited 2023. All Rights Reserved.
FT and Financial Times are trademarks of the Financial Times
Ltd. Not to be redistributed, copied or modified in any way.