KPMG boss admits Big Four firm misled regulator in Carillion auditby
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.
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.”