KPMG faces Carillion auditing investigation

31 January 2018 Consultancy.uk

Professional services firm KPMG is set to be investigated by the UK’s Financial Reporting Council over its role in the collapse of construction firm Carillion. The probe will examine whether the organisation’s auditor failed to adhere ethical and technical industry criteria, which could carry a hefty fine, should KPMG be found against.

KPMG has seen a turbulent beginning to 2018 in the UK. The firm was recently forced to withdraw from its engagement in the Grenfell fire inquiry, amid allegations that it had close business ties to three of the groups under investigation. Now, KPMG has discovered it is set to face an investigation of its own, following the collapse of Carillion in January.

The UK Business Secretary, Greg Clark, welcomed the announcement from the Financial Reporting Council (FRC), as the accounting watchdog revealed plans for the investigation, following inquiries made since Carillion’s shock profit warning in July. The FRC confirmed that the investigation, which will cover 2014 to 2016 and additional audit work carried out by KPMG during 2017, will be conducted “as quickly and thoroughly as possible”.

KPMG faces Carillion auditing investigation

Carillion, a British professional services firm which provided facilities management and construction services to the UK public sector, entered liquidation earlier in January, threatening almost 30,000 jobs and jeopardising the delivery of a number of keystone services. According to Carillion’s website, the outsourcer was also “one of the largest providers of facilities management to the NHS”, employing about 8,000 people in the healthcare division, while managing 200 operating theatres, with 300 critical-care beds and just under 11,500 in-patient beds. As the NHS has come under increasing strain in recent years, Carillion’s failure could cause a crisis within the vital public institution.

The company, headquartered in Wolverhampton, United Kingdom, ran up unsustainable debts totalling around £1.5 billion, and issued three profit warnings over 2017 as a result. In the midst of this, KPMG, who were already auditors for the company, were asked for the additional provision of a strategic review, as the UK construction group battled to rebalance its finances. The report featured a focus on cutting costs including wages, and collecting more cash from contracts.

The FRC investigation will see the auditing ombudsman consider whether KPMG breached the ethical and technical standards for auditors, alongside any other negligence which might have played a role in the collapse of Carillion. Several areas of KPMG’s work stand to be scrutinised, including estimates and recognition of revenue on significant contracts and accounting for pensions.

The FRC is working closely with the Financial Conduct Authority (FCA), the Insolvency Service and the Pensions Regulator, which is already in the process of investigating Carillion’s financial announcements between 7 December 2016 and 10 July 2017.

KPMG said that the organisation would comply fully with the FRC’s investigation, further stating the Big Four firm believed it had conducted its role as Carillion’s auditor “appropriately and responsibly”.

Should the regulators find against KPMG, there could be a heavy price to pay for the professional services giant. In 2010, the FRC conducted a similar investigation into the auditing of Connaught, another public services outsourcer which went into administration. The collapse of the social housing provider saw 10,000 jobs lost – and led fellow Big Four member PwC to pay a £5 million fine for ‘misconduct’ over the auditing services it provided to Connaught. This was the largest ever fine to be administrated by the FRC to date, but should they see fit to make an example of KPMG following the new investigation, this could be set to rise.

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