KPMG is in the firing line again after regulators delivered a critical report on its audits of Carillion before the construction group’s dramatic failure.
The Big Four auditor gave Carillion a clean bill of health in March 2017, but within ten months the Government contractor’s finances had deteriorated so much that it collapsed.
It was one of the worst corporate catastrophes in years, with the company leaving behind debts of £7billion, pension liabilities of £1billion and thousands without jobs.
Warning signs: Thousands lost their jobs after Government contractor Carillion folded
The Financial Reporting Council (FRC) launched a probe just two weeks later, looking into audits carried out by KPMG from 2013 to 2017. And yesterday the regulator revealed it had finished an initial report and sent it to KPMG, suggesting that rule breaches have been uncovered. After carrying out initial investigations, the FRC usually closes enforcement cases or, if rule breaches are found, delivers an initial investigation report. Auditors are then given eight weeks to respond to allegations, before the FRC decides whether to press ahead with enforcement action.
KPMG received the report on August 28, and has until October 23 to respond. It could choose to contest the findings at an independent tribunal.
A spokesman said: ‘We believe it is important that regulators acting in the public interest review the audit work related to high profile cases such as Carillion and we are cooperating fully with the FRC’s investigation.’
The collapse of Carillion in January 2018 triggered widespread calls for tough reforms of the audit sector, with an inquiry by MPs accusing KPMG of being ‘complicit’ in directors’ ‘increasingly fantastical figures’.
They said Carillion’s failure to turn a profit from key contracts was masked ‘by a continuing stream of new work’ and misleading accounting practices.
At the same time, bosses approved ever-increasing dividends that gave the impression it was a healthy firm. But Carillion’s shares went into free-fall after a stock market announcement exposed its problems in July 2017, slashing its value from more than £2billion to £90m in months.
MPs said KPMG was partly to blame for failing to be sceptical enough during its 19 years working for the company, which saw it amass £29m in fees.
Along with Big Four rivals Deloitte, EY and PwC, KPMG carried out work worth £72m for Carillion in the lead up to its failure, which saw the auditors accused of ‘feasting on what was soon to become a carcass’.
The FRC focused particularly on the financial performance of Carillion’s major contracts in the construction and services divisions, and whether this was properly reported.