Save content
Have you found this content useful? Use the button above to save it to your profile.
KPMG hit with massive fine AccountingWEB KPMG Canada Square
istock_KPMG_Lubo Ivanko

KPMG hit with record fine over Carillion audits

by

The accounting regulator hit KPMG with a record £21m fine following the torrent of serious breaches in the audit of collapsed construction company Carillion.

12th Oct 2023
Save content
Have you found this content useful? Use the button above to save it to your profile.

KPMG was given a combined financial sanction of £30m following the conclusion of the Financial Reporting Council’s (FRC) investigation into the audit of Carillion plc. However, the fine was reduced by 30% to reflect KPMG’s co-operation and admissions. 

KPMG LLP was fined £18,550,000 (reduced from £26,500,000) for the audit of Carillion for the financial years ended 31 December 2014, 2015 and 2016 and additional audit work in 2017, plus a further £2,450,000 (reduced from £3,500,000) for the audit of certain transactions for the financial year ended 31 December 2013. 

The Big Four firm was also severely reprimanded. Alongside the financial sanctions for KPMG, Peter Meehan, a former partner of KPMG LLP and audit engagement partner, was fined £350,000 – again reduced 30% – and was excluded from the Institute of Chartered Accountants in England and Wales (ICAEW) for 10 years. Meanwhile, former audit partner Darren Turner was handed a £70,000 fine for his work on the 2013 audit. 

This fine for audit breaches comes after KPMG has already received a £14.4m fine from the FRC in May 2022 over falsifying documents and providing audit inspectors with misleading information. 

KPMG had to also reach into its deep pockets again in February 2023 to settle a £1.3bn creditor claim.

When Carillion plummeted into liquidation in January 2018 the construction company had just £29m in cash and liabilities of nearly £7bn, and the collapse led to the loss of thousands of jobs and significant delays to projects such as the building of hospitals.  

Damning findings

Jon Holt, KPMG’s chief executive and senior partner, called the findings “damning” and said he was “very sorry that these failings happened in our firm”.

“It is clear to me that our audit work on Carillion was very bad, over an extended period. In many areas, some of our former partners and employees simply didn’t do their job properly. Junior colleagues were badly let down by those who should have set them a clear example, and I am upset and angry that this happened at our firm.”

Holt said that the firm has since done “an enormous amount” to improve controls and oversight across the firm to ensure the failings don’t happen again. 

“As an auditor, I simply cannot defend the work that we did on Carillion. As the chief executive of KPMG, I am determined that we face up to this failure, and I am absolutely committed to continuing to work with my colleagues across the business to ensure that nothing like this can happen again.”

FRC’s investigation

The accounting regulator’s investigation found that KPMG didn't apply “rigorous, comprehensive and reliable audits” in the three years leading to the very large public company’s demise.    

In particular, the FRC pinned blame on KPMG and Meehan’s work in 2016, where Carillion’s accounts were signed off as a going concern, despite indicators that the operations were lossmaking and reliant on short-term and unsustainable measures to support its cashflow.  

The FRC found that KPMG didn’t gather sufficient evidence and failed to subject Carillion’s management’s judgment to effective scrutiny. 

The regulator also criticised the close relationship between KPMG and Carillion, which created a risk to their objectivity. This manifested itself in a number of instances where Meehan and other members of the audit team accepted financial information from Carillion’s management without any robust scrutiny. 

In addition, the FRC concluded that in 2016 KPMG failed to ensure the audit engagement was properly managed and supervised, including not completing audit procedures until more than six weeks after the date of the audit report. Additionally, there were no audit procedures underpinning the 2016 audit report that ensured it had been completed, documented and reviewed satisfactorily before it was issued. 

The breaches related to KPMG’s audit work on eight of Carillion’s most significant UK contracts and significant audit breaches were found in each of those. 

The second sanction related to KPMG’s failure to approach the audit of transactions in 2013, which led to an increase of £41m reported profit in the 2013 financial statements with an adequate degree of professional scepticism. 

Elizabeth Barrett, the executive counsel, concluded that the number and seriousness of deficiencies in the audits of Carillion were “exceptional and undermined that credibility and the public trust in audit”.

“Many of the breaches involve failing to adhere to the most basic and fundamental audit concepts, such as to act with professional scepticism and to obtain sufficient appropriate audit evidence. The breaches in relation to the 2016 audit even include failing to ensure that the audit process itself was properly managed and that the audit file was a reliable record. These requirements lie at the heart of proper auditing.”

Replies (34)

Please login or register to join the discussion.

avatar
By FD-HBC
12th Oct 2023 10:13

Sadly this won't make one iota of difference to them.

Thanks (13)
By Duggimon
12th Oct 2023 10:18

It's criminal collusion like this that makes it nigh on impossible for small practices to get in to audit now. The amount of regulation, red tape and administration we have to deal with that's been introduced in the wake of these "failures" by the big firms makes it virtually impossible for smaller firms to profitably operate in the sector.

The most galling thing is it's not a failure of processes or a lack of documentation that's caused the issues, it's persistent deliberate falsification of findings in collusion with the clients for financial gain.

Thanks (12)
Replying to Duggimon:
7om
By Tom 7000
12th Oct 2023 10:59

Do you really think its collusion, rather than negligence or just being overwhelmed with information?

Thanks (2)
Replying to Tom 7000:
By Duggimon
12th Oct 2023 12:23

They never accidentally understate assets or overstate liabilities due to negligence or being overwhelmed, these errors only ever go in favour of the company being audited whose management rely on good results in the financial statements and audit report.

I suppose I have no proof of any collusion and that could be a coincidence but equally I have no reason to trust the word of a business who's just been fined £21m for lying on audits.

Thanks (1)
Replying to Duggimon:
avatar
By paul.benny
13th Oct 2023 10:58

Duggimon wrote:
They never accidentally understate assets or overstate liabilities ...

We only find out about audit failures when companies go under. Understatement of assets doesn't lead to bankruptcy

Thanks (0)
Replying to paul.benny:
By Duggimon
16th Oct 2023 09:16

We only find out about audit failures when the FRC investigate, publish their findings and those are reported by the media.

If that only happens when companies go under then I would suggest the system is rather flawed.

Thanks (0)
avatar
By ColA
12th Oct 2023 10:25

The complacency in practice is legion.
Those of us who spent decades outside the hallowed cloisters are little surprised

Thanks (5)
avatar
By dmmarler
12th Oct 2023 10:34

Unfortunately audit work has to be done to a strict timetable for PLC reporting and, if there is insufficient interim work undertaken to validate systems, etc., then the audit work is curtailed to fit the deadines. We all know this is wrong ...

Thanks (7)
Replying to dmmarler:
avatar
By Justin Bryant
12th Oct 2023 10:38

Yes. When I was an audit junior (about 3 decades ago now), materially was T/O divided by the number of days to sign-off (I'm only half joking). Nothing has changed there it seems.
https://www.bbc.co.uk/news/uk-67087757

Thanks (5)
Replying to dmmarler:
7om
By Tom 7000
12th Oct 2023 11:01

That is a good point you have brought to the top table. Now then, what's your solution to this dilemma we face...

Thanks (0)
Replying to Tom 7000:
avatar
By dmmarler
12th Oct 2023 15:03

One of the things I should like to see is the disaggregation of materiality so each company is treated separately. I recall finding a £250K "anomally" in a small subsidiary which the audit partner dismissed as not material within the context of the group. I am sure others have come across similar.

Thanks (2)
avatar
By Mandy Kerley
12th Oct 2023 10:37

This makes an absolutely mockery of our profession. The Senior Partner says Sorry!! How many people lost their jobs either directly or indirectly due to the collapse of Carillion?? What was the cost to the taxpayer of bailing out many of the people affected and the shoring up of the contracts that needing completing?? I expect KPMG have claimed on their PI cover so ultimately it is the rest of us who will pay the fines as well. Have the partners handed back any profits to cover this....I very much doubt it. They should have their audit licence taken away, sorry isn't good enough!!

Thanks (7)
Replying to Mandy Kerley:
7om
By Tom 7000
12th Oct 2023 11:02

No Blame for the directors, its all the auditors fault.....hmmmm

I also doubt KPMG have PII, I suspect they self insure or something and the partners will all get a 1/2% profit share deduction

Thanks (4)
Replying to Tom 7000:
paddle steamer
By DJKL
17th Oct 2023 15:04

£1.3billion is a lot to self insure, these fines in the millions no doubt get met by the firm but the damages claim reported as £1.3bn surely is insured?

Thanks (0)
avatar
By The Rogue
12th Oct 2023 10:37

Do KPMG have any credibility at all?

Thanks (4)
avatar
By richards1
12th Oct 2023 10:38

When partners in these big four earn eye watering amounts what do you expect?

Thanks (4)
Replying to richards1:
7om
By Tom 7000
12th Oct 2023 11:04

They have to as its inevitable that one day they will all be fined £0.5m and be banned. An audit file can never be finished. If you give me one I can spend a couple of hrs looking through it and give you 30 more tests to do....its almost an impossible job sometimes. So they need the large pay for the risk in the job so when it happens they can at least pay their bills for all the stress involved in the 100000000s of hours worked over the prior 30 years of their careers ....

Also the real dilemma is if you smash a GC qualification on a listed plc , the business ends on that day.... If you think it can squeeze by one more year as the cashflows and budgets look ok....

Thanks (2)
avatar
By petestar1969
12th Oct 2023 10:42

Those fines are a spit in the ocean to KPMG.

What needs to happen is the big accountancy firms need breaking up.

When I first got into accountancy we used to talk about the Top Ten, now we have the Big Four. It needs changing......

Thanks (5)
avatar
By JustAnotherUser
12th Oct 2023 10:57

The demise of Carillion...More than 3,000 jobs were lost at the company, and the collapse affected 75,000 people working in its supply chain.

KPMG made provisions in its accounts for the financial year ending September 2022 for £179m to cover future fines and legal claims costs.

KPMG revenue 34.64 billion

Darren Turner was handed a £70,000 fine for his work on the 2013 audit.

KPMG UK partner pay jumps 10% to £757,000

KPMG reduced its audit fees from £1.8 million to £1.4 million between 2008 and 2016

KPMG having fulfilled this role since 1999

19 years x average 1.5m = 28.5m (another source KPMG – which itself collected £29m in fees).....

.... astounding numbers, embarrassing in fact, criminal!

Imagine any crime, that if you committed enough of it, getting caught once in a while just dents your overall crime income by a tiny percentage, the charges then get reduced because you hold your hands up to the one time you get caught and you are left to carry on committing such crimes, rinse and repeat.

Thanks (3)
Replying to JustAnotherUser:
7om
By Tom 7000
12th Oct 2023 11:16

I reckon that's 25 people for 2 months solid working on that audit... makes you wonder how you couldn't pick up the deficiencies, there must have been 10 qualifieds on that at least... well that's how I would staff it, but never worked there so not sure what the team would have looked like....anyone got more of an insight, to satisfy my curiosity?

Thanks (1)
avatar
By L Haldane
12th Oct 2023 11:07

This sort of behaviour has completely tarnished what was once considered to be a gold standard profession and it won't get any better until these rogues are really made to pay and are jailed for their dishonesty.

When I qualified, back in the eighties, I was proud to call myself a CA, but all pride in my profession went out the window when ICAS refused to disqualify Fred Goodwin, who remains a CA to this day.

Sadly, these new lows don't shock any of us any more.

Thanks (3)
avatar
By 2TunTed
12th Oct 2023 11:30

£21M fine between say, 500 equity partners is £42K each which is maybe 10% or less of their profit share. If the salaried partners have to bear a slice of the fine then less. KPMG have increased the number of salaried partners so this seems likely. Pretty annoying sure but enough to really change things? I don't think so. Just a cost of doing business. Being sued by the Government for £1.8Billion might be a bit more persuasive though.

Thanks (1)
avatar
By Springfield
12th Oct 2023 11:32

A bit like VAR, everybody wants something different from an audit. Teams want decisions in their favour, referees don't want to look like fools, fans just want something visible and reliable and the authorities want to say how good excellent their governance is. All against the clock.

If major audits are to ever regain their credibility then perhaps it's time to go back to the beginning. Which to me is consider this question. Is the accounting system used by the company suitable for producing accurate, reliable and timely results, with built in checks and balances that prevent contamination with errors, or fake or fraudulent financial data?

The core "actual transactions" balance sheet and P&L should be produced immediately after the year end and checked for all the usual dodges - eg suppressed purchase invoices, fake sales invoices and forged or missing bank account statements. The audit team should be mindful of the idiosyncrasies of the business sector and ask themselves two questions.

(1) Is the unadjusted profit or loss credible and accurately reflected in the movement of the bank balances and other balance sheet items? and,
(2) If I were motivated to understate or overstate this company's profits or losses, how would I go about it?

Once the core figures for the year-end are agreed, only then the senior auditor should sit down with the FD and ask them what year-end adjustments they propose to make. For example the booking of anticipated future profits, stock or property revaluations, bad debt write-offs, pension adjustments, exceptional items and so on. In each case the FD should present a detailed justification of each proposed adjustment, including an analysis of how accurate previous adjustments have proved to be.

I know that real life is a lot more complicated than this but, like VAR, unless you get the process right the outcome is unreliable.

Thanks (0)
avatar
By Tax bot
12th Oct 2023 11:50

I trained with KPMG quite a few years ago. The only thing that mattered then was to get the job done within budget. On my first job as a trainee I queried an invoice that I was checking. The audit senior told me to pick another one and don't look for problems, which surprised me as I though that was what we were there for!

I can't imagine what it is like now.

Thanks (5)
Replying to Tax bot:
avatar
By petestar1969
12th Oct 2023 12:14

Its not just KPMG. I trained at an accountancy firm where going over budget was regarded as being on the same level as plotting to kill the Queen. Nevermind all the other jobs that were done within budget, it was the one that wasn't that everyone talked about.

That's why very early in in my accountancy journey I discovered creative time allocation so none of the jobs went over.

All the time accountants uses time-based billing, this kind of nonsense will prevail. I haven't filled in a timesheet for years and none of my clients have had any issues.....

Thanks (1)
avatar
By [email protected]
12th Oct 2023 11:57

Once again the “audit” comes under scrutiny. Are we sure we are truly doing what is really needed in an audit. As long as the auditor is paid by the company it is auditing, auditors will continue to have tunnel vision and not look at the complete financial picture.

How can a company be given a complete clean bill of health and go into administration the following year?
As accountants we all know that financial problems don’t happen overnight and surely trained auditors are supposed to be the people who can recognise those signs and file the appropriate reports. It should be incumbent on the auditor to report to the Directors when things appear to be going wrong, not just that their bookkeeping is in order. I know many auditors will cry out “that’s what we do” really?

The major company’s seem more concerned about their E credentials rather than their financial standing and have little concern for the misery an administration has on those creditors who stand to lose their livelihoods.

It’s time for an overhaul of the “audit” to also include a complete financial health check giving some level of confidence to those creditors who may be or are intending to work for the company.

I am not trying to put the company’s financial burden on to the auditor but I do feel they should have some level of duty to ensure that the financial standing of the company going forward has been examined and their audit report gives some indication should they feel their are financial problems to be addressed.

Thanks (2)
avatar
By tpcreynolds
12th Oct 2023 13:52

For too long the Big 4 have gotten away with 'dodgy' audits on customers willing to pay extortionate Big 4 audit fees. Any fines ( not that there was many) were more a 'cost of sale' charge.

KPMG apology? Nothing more than 'crocodile tears' for being found out.

It is long overdue for the BIG 4 to be broken up. Their stranglehold on audit should be terminated.

Thanks (1)
avatar
By Arbitrary
12th Oct 2023 15:55

Even more money for the ICAEW then. What are they going to do with the vast sum of money they have in store from recent fines? Does anyone know if they have said anything substantial about this? The position seems ridiculous: ICAEW member firms make a mess and the ICAEW then gets a load of cash.

Thanks (1)
Replying to Arbitrary:
avatar
By paul.benny
13th Oct 2023 10:55

Arbitrary wrote:
Even more money for the ICAEW then. ..

Not so. This is a penalty levied by the FRC.

ICAEW get their turn next - there is pecking order that means criminal trials and investigations by statutory bodies come first.

Thanks (0)
Replying to paul.benny:
avatar
By Arbitrary
13th Oct 2023 12:01

If you look at the ICAEW 2022 Report where it shows income from FRC fines of £14.9 million for 2022, the figure for 2021 being £13.5 million.
I now however note that the latest KPMG fine was under the Audit Enforcement Procedure and not under the Accountancy Scheme, so I agree with you that the ICAEW does not get this money which is a good thing.

Thanks (1)
avatar
By [email protected]
12th Oct 2023 16:51

As you say why should the institute prosper from poor standards displayed by their members.

The fine should go to an account to help towards paying the creditors who inevitable suffered at the results of an unexpected administration, as demonstrated by the collapse of Carillion.

Thanks (2)
Replying to [email protected]:
avatar
By farrcorfe
13th Oct 2023 14:15

Well said. I think the Institute itself should be heavily fined for allowing membership of such auditors.. What price monitoring visits by the regulator? Just passing some exams years ago doesn't mean one is any good at the job, of course.

Thanks (0)
avatar
By R C Pearce
12th Oct 2023 17:21

If I had failed to do my job I would have been sacked. Those partners who audited the accounts should be prosecuted for perpetrating a fraud. Not only on the Owners- the shareholders- but the rest of us whose money the Government had to pay twice for especially on the rebuild of the Liverpool Hospital. The number of small firms who have gone to the wall as a result of same should be compensated by KPMG. All Board Directors in post during the time should be prosecuted for failing to carry out their statutory duty of care to the shareholders of Carillion. I await with interest the Serious Fraud Office Investigation into KPMG which should surely follow!!!

Thanks (3)
avatar
By Ermintrude
16th Oct 2023 10:04

As a former auditor myself, including a short time with the Audit Commission - whom I was dismayed to find ignored my negative findings and just wanted to keep the client happy - I am not remotely surprised to read the auditors were just basically winging in. I felt part of a "pretend" profession.
I AM however surprised auditors have been sanctioned, it also being a "Teflon" profession.

Thanks (0)