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