Big Four accused of 'feasting' on Carillion as combined £72 million fee revealed

12 March 2018 Authored by Consultancy.uk

Executives from the Big Four of PwC, EY, KPMG and Deloitte have come under pressure from MPs to justify their roles in collapsed outsourcer Carillion. A Parliamentary committee has suggested the gang of four were “feasting” on the company’s “carcass”, after emerged they had received a combined total of more than £70 million in fees from the beleaguered construction firm.

Last month Carillion filed for compulsory liquidation, after talks with potential lenders failed, putting thousands of jobs and businesses at risk. The company, headquartered in Wolverhampton, United Kingdom, ran into trouble after losing money on big contracts, as well as racking up unsustainable debts totalling around £1.5 billion.

The selection of an administrator proved uncommonly difficult for authorities, however, as it soon emerged that each member of the Big Four professional service firms had been in some way involved with the group, recently. EY, who were initially thought to be in line to oversee proceedings, were ruled out due to a role they adopted in July 2017, to help implement a strategic review with a focus on cutting costs, and collecting more cash from contracts.

Deloitte had been engaged for some time as Carillion’s internal auditors, alongside rivals KPMG, the external auditors of the firm. KPMG has since become the firm at the centre of the Carillion controversy, having fulfilled this role since 1999, through until the time of its profit warnings and consequent collapse. As a result, the Financial Reporting Council (FRC) is currently investigating the firm, covering the years of 2014, 2015 and 2016 and additional audit work carried out in 2017.

Big Four fees from Carillion since 2008

The Official Receiver (OR) has since stated that it considered PwC to be the only option to appoint as special managers to administrate the insolvency, as the only member of the largest auditing firms that would not have an immediate conflict of interest, stating it has been granted £150 million of public funds to run the Carillion liquidation.

However, PwC, has also been found to have had two separate roles in Carillion in the run up to its demise, including one advising the defunct company’s pension trustees. More recently, in its role as administrator, the firm provoked further ire for its alleged failure to supply axed Carillion workers with basic information, which they required to receive redundancy payments from the Insolvency Service.

£72 million bill

Now, following a steadily growing number of links between the four professional services giants and the collapsed contractors, the Parliamentary Committees for Work and Pensions and Business and Energy and Industrial Strategy have asked KPMG, PwC, EY and Deloitte to outline their involvement with Carillion over the last 10 years. The demand follows the publishing, by the two committees, of figures contained from letters from the four firms, revealing the large collective fee the firms had gleaned from Carillion-based work.

PwC was paid most of the four in fees, bringing in a total of £21.1 million, although it received the lowest amount directly from Carillion, with £8.5 million coming directly from the company. PwC brought in a further £6.5 million from government contracts it fulfilled as part of its work with Carillion, and £6.1 million from its work with the group’s pension schemes, something which none of the other firms supplied figures for.

When looking solely at money directly from Carillion, KPMG were the top earners. The firm – which also drew Parliamentary ire for its role auditing another floundering outsourcing firm, Capita – was paid £16.8 million by Carillion itself, along with £3.4 million from government work, totaling £20.2 million in fees relating to Carillion since 2008.

EY was paid £15.6 million from the company and £2.7 million in tax-payer funds, totaling £18.3 million from Carillion over the last 10 years, while Deloitte was paid £13 million. This consisted of £10.3 million from the company and £2.7 million from the government.

In response to the Big Four’s disclosures, Frank Field, chair of the Work and Pensions Committee, said, "The image of these companies feasting on what was soon to become a carcass will not be lost on decent citizens. We saw at the end of our evidence session that the former directors of Carillion are, unlike their pensioners, suppliers and employees, alright. These figures show that, as ever, the Big Four are alright too. All of them did extensive – and expensive – work for Carillion.”

The committees also pointed out that the past three Carillion chief financial officers were ex-Big Four. Richard Adam and Emma Mercer, the most recent CFO, previously worked at KPMG, while Zafar Khan and audit chairman Andrew Dougal worked for EY in the past.

Big Four response

In its response letter to the committees, KPMG said that it welcomes the FRC probe and believes, “it is important that regulators acting in the public interest review the audit work related to high profile cases such as Carillion”, having already stated that the Big Four firm believes it conducted its role as Carillion’s auditor “appropriately and responsibly”.

KPMG’s letter also sought to highlight that 14% of all its contracts with Carillion were making a loss at the end of 2016, and that KPMG reduced its audit fees from £1.8 million to £1.4 million between 2008 and 2016, despite its hourly fees increasing. However, the joint committees pointed out that KPMG’s letter also suggested that the firm did not press Carillion to disclose further information about adopting the new revenue recognition standard, despite the FRC stating in October 2016 that it expected most companies to have made "substantial progress in their implementation of these standards."

Big Four fees from Carillion since 2008

Leeds West MP, Rachel Reeves, chair of the Business and Energy and Industrial Strategy committee, said, "KPMG has serious questions to answer about the collapse of Carillion. Either KPMG failed to spot the warning signs, or its judgement was clouded by its cosy relationship with the company and the multi-million pound fees it received.”

In a further response to the committees’ comments, a KPMG spokesperson said, the firm welcomes the opportunity to appear before the joint committee on 22 February, as well as the chance to assist the inquiry with their investigations. This was something echoed by PwC, which released a statement saying, “It’s appropriate that the joint committee consider all aspects of the collapse of Carillion and we will continue to cooperate fully with their enquiries.”

The firm also sought to distance itself from the ill-fated final months of Carillion’s operations, stating, “The joint committee’s request for information dates back to 2008 and the majority of the work that PwC undertook directly for Carillion was carried out prior to June 2015 rather than in the last few months before its collapse.

While there are only four large professional services firms, the market has been subject to extensive review by the Competition Commission (now succeeded by the Competition & Markets Authority) and European Commission. We comply with all rules that have resulted from these extensive reviews.”

While both EY and Deloitte declined requests from the press to comment, Steve Varley, UK chairman at EY, said in the firm’s letter to the committees, “We are saddened that such a solution could not be found and are very conscious of the impact the company’s collapse has had on its pensioners, employees, suppliers, sub-contractors and on those who rely on the services which they were providing. We therefore understand your concerns and the need to conduct this inquiry in a timely fashion. We believe it is important to ensure lessons are learnt from this matter.”

Despite the heightened scrutiny regarding the Big Four, the UK government has continued to place faith in their services elsewhere. Most recently, Deloitte has been positioned to monitor the situation at struggling construction firm Interserve, on behalf of the Cabinet Office.

Commenting on the reportedly dire situation at Interserve, which holds numerous public service contracts, and also has pre-existing business relationships with EY and PwC, a government spokesperson said, “We regularly meet with all of our suppliers to ensure the efficient delivery of public services. We do not believe that any of our strategic suppliers are in a comparable position to Carillion.”

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