KPMG hit with record fine for Carillion role

16 October 2023 Consultancy.uk

Big Four firm KPMG has become the latest member of the quartet to break an unwanted record: recipient for the largest fine from the Financial Reporting Council. The watchdog slapped a £21 million bill on the firm for its work with collapsed outsourcer Carillion.

Before it collapsed in 2018, Carillion was a British professional services firm which provided facilities management and construction services to the UK public sector. When it entered liquidation it cost almost 30,000 jobs, and jeopardised 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.

The company, headquartered in Wolverhampton, ran up unsustainable debts totalling around £1.5 billion, and issued three profit warnings over 2017 as a result. With news of the company’s downfall, KPMG swiftly came under intense scrutiny – having been the auditor for the company, and also having been asked for the additional provision of a strategic review to help Carillion rebalance its finances.

KPMG hit with record fine for Carillion role

Due to KPMG’s involvement in the firm as it collapsed, the Financial Reporting Council (FRC) launched an investigation into KPMG’s audit of the financial statements of Carillion. These included the years ended 31 December 2014, 2015 and 2016, and additional audit work carried out during 2017. Five years later, the results of the investigation have finally been announced – citing "an unusually large number of breaches of relevant requirements".

The FRC found KPMG had failed to gather enough appropriate evidence to enable it to conclude that Carillion's financial statements "were true and fair". At the same time, the auditor had failed to conduct its audit work "with an adequate degree of professional scepticism", even when statements and estimates by Carillion's management team appeared "unreasonable" or "inconsistent".

KPMG was resultingly handed a record £21 million fine over "exceptional" failures in its accounting work for Carillion. According to the accounting watchdog, the size of the fee was due to the "number, range and seriousness" of issues in KPMG's work.

KPMG's UK chief executive – who was not its leader at the time of the Carillion incident – labelled the FRC's findings as "damning". He added that it was “clear to me that our work on Carillion was very bad, over an extended period” – and that in “many areas” the firm’s former partners and employees had simply not done “their job properly.”

The news is the latest in a succession of punishments meted out for the Carillion debacle. While KPMG is now striking a more conciliatory tone with its statements to the FRC, last year it was told to pay £14 million for misleading the FRC about its work for Carillion.

The story is also one of the leading cases cited among calls for the Big Four to be broken up in the UK. With KPMG having been both an advisory and accountant to Carillion, the incident has been used to flag up a conflict of interest that critics believe is yet to be tackled by either the FRC or the government. Rival EY experimented with divorcing its accounting and advisory wings in response to these pressures last year, but after a costly series of defeats in partner votes, it abandoned the plans.

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