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KPMG boss admits Big Four firm misled regulator in Carillion audit

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There may be no way back for KPMG after an admission staff falsified documents relating to the audit of collapsed outsourcer Carillion, industry experts have said, as an incendiary tribunal into misconduct at the heart of the failure revealed deliberate attempts to deceive accounting watchdogs.

12th Jan 2022
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KPMG has admitted fabricated documents were submitted to regulators during the auditing of failed outsourcer Carillion, whose 2018 collapse became a byword for accounting scandal.

Audit experts believe the acknowledgement is uniquely damaging to the industry and have called for the firm to be broken up, with criminal sanctions for those found guilty of such misconduct.

A disciplinary tribunal expected to last five weeks opened with fireworks on Monday when Jon Holt, chief executive of the Big Four firm, said it was “clear” KPMG had misled the regulator.

“The misconduct that this tribunal will hear about over the coming weeks is disturbing and upsetting for me and for my colleagues, who are committed to serving the public interest with honesty and integrity,” Holt said in a statement to the court.

“We became aware of the misconduct at the centre of this case as a result of our own internal investigations and immediately reported it to our regulator. We have cooperated fully with their investigation since then,” he said.

The firm, along with six of its former auditors, are accused by the Financial Reporting Council (FRC) of hatching a scheme to forge documents and misdirect a regulatory review of the audits of Carillion and IT company Regenersis.

The FRC alleged that “relevant individuals acted with a lack of integrity in dishonestly or recklessly misleading the regulator”, according to tribunal documents.

“It is of course for the tribunal to reach a conclusion on the allegations as they relate to the individuals concerned. Nevertheless, it is clear to me that misconduct has occurred and that our regulator was misled,” Holt said. “We will assist the tribunal in any way we can, as we have cooperated fully with the investigation into these matters,” he added.

Holt said he was “very sorry” for the misconduct and said “we do not tolerate or condone it in any way”.

Falsified and fictional documentation

Lawyers for the FRC said dishonesty and lack of integrity from KPMG’s audit quality review team were evident in their attempts to cover failings in KPMG’s audit of Regenersis for the year ending 30 June 2014 and of Carillion for the year ending 31 December 2016.

“They failed to act with honesty and integrity in their involvement in the answers given to questions posed by the FRC AQR team inspectors,” Mark Ellison QC, acting for the FRC.

The KPMG auditors at the time, Peter Meehan, Alistair Wright, Richard William Kitchen, Adam Bennett, Pratik Paw and Stuart Smith, are accused of various degrees of involvement in the plot to hoodwink the regulators. Meehan, who led the Carillon audit, has blamed his junior colleagues, while other former colleagues pointed fingers at each other.

The FRC’s barrister said the group were asked questions by the inspectors relating to a lack of material on the audit file to justify their audit judgements.

“Rather than giving straightforward and honest answers to those questions,” they, “knowingly or recklessly misled the Audit Quality Review (AQR) inspectors by their involvement in the creation of documents during the inspections that were made to look like they had been created at the time of the relevant audit,” Ellison said.

The FRC opened a probe in November 2018 after KPMG had self-reported certain matters relating to the review of the 2016 Carillion audit. After a series of delays, the scope of the investigation was widened in July 2019 to include the inspection of the 2014 Regenersis audit after KPMG had self-reported certain matters relating to that inspection.

After years of investigation, political and public fury, in September 2021 the FRC announced a formal complaint of misconduct had been made and would proceed to a disciplinary tribunal. The cause of the collapse of Carillion is not being investigated by the tribunal.

FRC lawyers said KPMG auditors working on the books of Regenersis drew up documents that were “forged” and then signed off as if they were created before the audit had concluded.

It was also alleged the auditors fabricated spreadsheets and altered minutes during the inspection of the Carillion audit, “pasting words” into documents created earlier that year to give the impression to regulators that fictitious meetings had taken place.

‘As damning as it gets’

Industry watchers have reacted with anger and bemusement at the allegations and admissions of wrongdoing at the outset.

“This is as damning as it gets, and one has to wonder whether a fine is sufficient punishment,” said Clive Pacey, owner of the brokerage and consultancy CPCM Finance “Surely there is no way back from the actual forgery of documents.”

Pacey said he believes two forms of punishment should be meted out.

“Firstly, the firm should lose its licence to practice,” he said. “Yes, that's severe, but malpractice at this level in many other professions would result in similar sanctions and it would serve as a warning.”

Too often firms have escaped adequate punishment for such offences, he said, while the misconduct keeps occurring.

“Secondly, the direct participants in a forgery should face criminal proceedings,” He said. “Too harsh? No. Ask the unsecured creditors, credit insurers and lenders who were completely conned by these fraudsters.”

In condemning the admission by KPMG, former shadow chancellor John McDonnell highlighted the work of Labour peer and accounting professor Prem Sikka and his corporate abuse team in exposing the poor state of audit.

“Action must now be taken against those involved in forging documents and misleading inspectors,” the Labour MP said. “It’s time to break up the Big Four. The whole chaotic structure of regulation must be reformed and rationalised. Severe sanctions for this corruption are also needed.”

Meanwhile, Lord Sikka criticised the government’s lack of action as regards reform of the audit industry, and in particular the reluctance to punish the four largest firms. “How low can it all get?” he said, referring to the tribunal.

“Big Four accounting firms charge vast fees for delivering dud [audits]. Firms are rewarded with government contracts. Reforms have been abandoned. Corrupt practises flourish. Audit reports are worthless.”

Replies (22)

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By Justin Bryant
12th Jan 2022 10:01

The cover-up is always worse than the crime (at least they self-reported to limit the damage there).

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Replying to Justin Bryant:
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By Hugo Fair
12th Jan 2022 10:34

Quite - although the readiness of those in charge to point the finger (downstream) before any findings does reek rather of what we saw with the NoW phone-hacking scandal ... where juniors and freelancers were lined up like sacrificial bundles to be tossed into the flames whenever necessary, whilst the top brass (with equal or greater culpability) remained and got promoted.
Also, without defending KPMG, the whole article does seem a tad premature.

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Replying to Hugo Fair:
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By Justin Bryant
12th Jan 2022 11:09

It's not premature in my view. This is an excellent article, and also shows that Lord Sikka cannot string a proper sentence together (I initially thought that his reference to "dud fees" was an Aweb typo, so a "[sic]" is needed there I think).

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Replying to Justin Bryant:
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By Hugo Fair
12th Jan 2022 16:00

I agree that the article is spot on ... my gibe was directed at the quoted "Industry watchers", who all seem to be operating on the basis of guilt having been established already.
They'll probably turn out to have been right in that assumption but, in the meantime, aren't they pontificating prematurely?

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Replying to Hugo Fair:
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By Justin Bryant
12th Jan 2022 16:10

I would say that's perfectly reasonable fair comment in the circumstances, just as our comments here are.

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By RFL H
12th Jan 2022 11:20

I wonder how many of these audit failures are due to the current audit standards not being fit for purpose - they do not in my opinion (unlike their predecessors) lead an auditor to gather relevant evidence to build to a valid audit opinion.

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Replying to RFL H:
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By winton50
13th Jan 2022 10:08

RFL H wrote:

I wonder how many of these audit failures are due to the current audit standards not being fit for purpose - they do not in my opinion (unlike their predecessors) lead an auditor to gather relevant evidence to build to a valid audit opinion.


Because the audit standards don't specifically state that you shouldn't forge documents, alter spreadsheets or insert words into documents after the fact?

I would think that this is the least we can expect of the profession. We shouldn't need to be told not to do this.

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By Paul Crowley
12th Jan 2022 13:17

Zero integrity. Deliberate criminal forgery.
But if this worse than leeching a cost free telephone help line how can ICAEW find an appropriate sanction?

https://www.accountingweb.co.uk/practice/general-practice/accountant-exc...

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Replying to Paul Crowley:
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By Dib
12th Jan 2022 15:21

They'll have to consider the death penalty :-o

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By frankdavid
13th Jan 2022 09:22

With reference to another thread about unaffiliated tax agents, were KPMG affiliated (hah) what were their compliance visits like ? Bet the proceedures were spot on . One has to laugh

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By Ben Alligin
13th Jan 2022 10:18

I don't suppose KPMG could knock out, sorry discover, some contemporary records they have of the audited guest list at the alleged wine and cheese event on 20 May 2020 to assist Boris?!

KPMG say the PM wasn't there - therefore it must be true.

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By paul.benny
13th Jan 2022 10:26

KPMG's admission is truly astonishing. Irrespective of sanctions applied, the reputational damage may be too great for them to continue.

I feel sorry for the honest and hardworking members of staff whose jobs may be at risk and who will be tainted by this affair.

Just one caveat before rushing to blame KPMG for the failure of Carillion. Other investigations have indicated that failure was primarily down to dishonest management and their over-optimistic judgement calls on, the profitability of contracts over several years. We don't yet know whether it's the alleged forgery of documents that allowed this to slip through.

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By rezasamii
13th Jan 2022 10:27

This sounds really bad. I read in Guardian newspaper that a formula was edited to increase the original materiality factor by a factor of 5 in order to justify reduced sample sizes (from £300K to £1.5M).

Talking about KPMG imploding is premature but then again it happened to Arthur Anderson immediately following the Enron's collapse.

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Jason Croke
By Jason Croke
13th Jan 2022 11:38

I like how one Partner, no doubt earning big 6 figure salary, has laid the entire blame for his failed audit on junior staff. Pretty sure that as an audit Partner you are responsible for the actions of your team, so even if a junior was doing something untoward (and I doubt that was the case or if it was it was with the approval of line managers and supervisors), blame rest firmly with the boss.

As Justin has posted, the cover-up is usually worse than the crime itself. Considering the sudden collapse of Carillion having just had a glowing audit, this alleged cover up was only to protect the Partners reputations and nothing else. If only the authorities could fine KPMG the equivalent of the cost to the taxpayer when Carillion collapsed because whatever the fine imposed, it'll be business as usual for the Big 4.

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By Mr J Andrews
13th Jan 2022 14:28

Clive Pacey's second proposed punishment of criminal proceedings is the obvious course for blatant forgery whilst Prem Sikka's call for action is nothing short of stating the bleeding obvious.
Incarceration for Meehan and co. for such bastardisation would set the example . But will we see yet another affordable fine - passed on to another client fee hike - followed by yet another scandalous audit - followed by even more Accounting Web articles about similar crooks within the so called Profession ?
Forgery is forgery. If the FRC are not competent to mete out the correct punisment , then perhaps the appropriate Police authorities should be involved. Arguably more up their street than tea parties at No. 10.

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By tedbuck
13th Jan 2022 15:42

The sad thing is - Is anyone surprised?

It certainly doesn't sound like it.

Does the ICAEW actually check on these people or is it a nod and a wink because they are too big to question? Or even worse members of the relevant committee. It sounds just like politics. Very dodgy.

There is also now very much a question of conflict of interest - perhaps auditors should not provide other services to clients of this size, or indeed any size.

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Replying to tedbuck:
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By paul.benny
14th Jan 2022 10:21

Auditors of larger companies* have been prohibited from doing non-audit work** for the same client for some years.

* The actual prohibition is for Public Interest Entities (PIEs) - essentially listed companies, including AIM, credit institutions (banks etc) and insurers.

** they can still limited audit-type work such as auditing regulatory returns. But not internal audit, tax, consultancy , M&A.

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By hwillia2
13th Jan 2022 19:08

Based on my own time employed for a big 8 firm in the 80s (I think there were 8 then) I'm just surprised that this sort of thing has taken so long to come to light. The process of low balling audit quotes to get other more lucrative work meant that the audit staff had an impossible time to finish in time. Staff would make up samples and if they drew an entry that indicated the system was not working as planned, would pick another one instead. I refused to play the game and as a result lost my job. I was told that I looked too hard when I saw problems and set out to find why. I saw a big potential problem with an oil company but they accepted an incorrect explanation from the directors. That was just part of the corruption...............

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Replying to hwillia2:
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By frankdavid
15th Jan 2022 10:12

You are probably of an age when you learned about the court case when the judge ruled that auditors were a watchdog not a bloddhound. In my time in auditing in the 1970's we joked that auditors had become greyhounds, they have now morphed into lapdogs

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By alanfg
14th Jan 2022 12:49

So, what about the shareholders?

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Replying to alanfg:
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By frankdavid
15th Jan 2022 10:08

Sharehoders are the last in line

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By SJH-ADVDIPMA
17th Jan 2022 10:00

What with the eye-watering fees from 'branded' audit firms, you would hope some of that went to adequately resource (both in number and quality of people) audits. How much is spent on and driven by the quasi-religious diversity, inclusion and equity, to virtue signal, whilst Rome burns?

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