KPMG fined a record £21mn over Carillion collapse

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KPMG has been fined a record £21 million by the UK’s accounting regulator over a “textbook” audit failure of government contractor Carillion. The collapse of Carillion, a government contractor, in 2018 sparked political controversy and calls for an overhaul of the audit department.

The Financial Reporting Council said on Thursday it had found “an unusually high number of breaches” of auditing standards, meaning Carillion “did not undergo a rigorous, comprehensive and reliable audit in the three years before its collapse”.

The fine, the largest ever imposed by the FRC on an audit firm, was reduced from £30m to reflect KPMG’s cooperation with the five-and-a-half-year investigation. The Big Four were ordered to pay costs of £5.3m.

Jon Holt, KPMG’s UK chief executive, said the findings were “shocking” and that he “simply cannot defend the work we have done on Carillion”.

Carillion, an outsourcing and construction group with operations in the UK and the Middle East, announced writedowns of more than £1 billion in 2017, months after KPMG issued an unqualified audit opinion on its accounts.

The company went into liquidation with debts of £7bn and just £29m in cash, sparking calls for a shake-up of UK audit and corporate governance regulations and prompting one MP to say he would not hire KPMG to audit “My audit content”. refrigerator”.

Its collapse endangered thousands of jobs and jeopardized the provision of school meals and the cleanliness of hospitals.

FRC chief executive Richard Moriarty said: “Carillion’s collapse has a significant and painful impact on staff, pensioners, investors, critical infrastructure projects, local communities and taxpayers. ”

“Our investigation concluded that this was a textbook case study of failure. Important safeguards that should have been in place were woefully lacking,” he said.

The FRC found “significant and serious irregularities” in KPMG’s work from 2014 to 2017 and said there were also errors in the 2013 audit.

The FRC said on Thursday that KPMG had “failed to respond to numerous indications that Carillion was losing money in its core business and relying on short-term and unsustainable measures to support cash flow”, adding that in many cases KPMG had simply “accepted ( ed ) presentation of financial information appropriate to Carillion’s management”.

The regulator said the company failed to gather sufficient evidence to conclude that the accounts were true and fair and did not take into account “impact”. . . There is substantial evidence that Carillion’s accounting may be incorrect or unreliable.”

The regulator added: “KPMG failed to conduct an effective review of Carillion management’s judgments and estimates, even when those judgments and estimates appeared to be unreasonable and/or appeared to be inconsistent with accounting standards and could suggest potential management bias.”

The regulator has also criticized KPMG’s management and oversight of audits, saying some audit procedures were not completed until more than six weeks after the audit was signed off and its records were “unreliable and in some cases misleading”.

Former KPMG partner Peter Meehan, who led the audit from 2014, was fined £350,000 and banned from the industry for 10 years, to run concurrently with his previous expulsion from the industry. In 2013 the head of the audit, Darren Turner, was fined £70,000. Their fines were reduced from £500,000 and £100,000 respectively. KPMG has contacted Meehan and Turner for comment.

KPMG Chief Executive Holt said the company’s work had been “terrible for a long time.”

“In many areas, some of our former partners and employees simply didn’t do their jobs,” he said.

The company has taken action “to improve controls and oversight across the company to ensure these lapses do not occur today”.

The Carillion case is the 16th case since 2018 in which the FRC or industrial tribunal has imposed sanctions on KPMG. The total fines and costs levied on the company at the time were more than £95 million, significantly higher than those of its competitors.

KPMG was fined £14.4m last year for deliberately misleading the accounting regulator during audit checks on Carillion and another UK company.

In February, KPMG paid an undisclosed sum to Carillion’s liquidators to settle a separate £1.3bn legal claim brought by the company’s liquidators, who claimed auditors missed “red flags” that led to the group’s The accounts were misreported.

Carillion’s former chief executive Richard Howson was this month disqualified from being a UK company director for eight years, while one of its former finance chiefs was banned from being a UK company director for 11 years.

The government is seeking to disqualify several other former directors in court proceedings.