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KPMG and Carillion: Forgery and Fabrication

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Philip Fisher draws together the story behind a disciplinary tribunal investigating allegations of forgery and fabrication of documents by representatives of the Big Four firm.

13th Jan 2022
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Some of my best friends are auditors – honest. Therefore, it gives me no pleasure to write yet another article asking why so many audits by the crème de la crème of our profession fail to meet basic levels of competence.

KPMG admits it misled regulator

This week sees the start of a disciplinary tribunal investigating the conduct of KPMG during its tenure as auditor of the now notorious Carillion and another company in the same industry, Regenersis.

The underlying story is well known but does not make comfortable reading for anybody in our once highly reputable industry.

One might generally assume that some parts of the media have it in for the profession but it is unlikely that anybody would accuse The Daily Telegraph of such an attitude.

However, an article in the Telegraph on Monday opened with the damning statement: “KPMG has admitted for the first time that it misled regulators over the audit of collapsed outsourcer Carillion, as a tribunal heard that its accountants allegedly forged documents to dupe inspectors.”

Once one delves into the detail, it only gets worse for the accounting giant.

Jon Holt, KPMG UK’s chief executive has admitted “It is clear to me that misconduct has occurred and that our regulator was misled.”

The cynical might wonder who has done the misleading, since it is surely obvious to everybody that those responsible were not some random people with whom Mr Holt had casual connections but his own firm’s partners and/or employees.

Forged and fabricated

The much maligned and soon (but how soon?) to be replaced Financial Reporting Council (FRC) hardly minces its words having accused KPMG of creating “forged” and “fabricated” documents in an attempt to mislead inspectors looking into the audits of Carillion and Regenersis.

Even though the FRC does not allege misconduct in the performance of the audits or claim that the financial statements were not properly prepared, its counsel Mark Ellison justified these claims by claiming that KPMG auditors created a spreadsheet and minutes of meetings to make it look as though they were put together during the audit, when they were actually manufactured months after it took place.

In response, Mr Holt accepted that “This misconduct is a violation of our processes and clearly against our values. It is unacceptable, we do not tolerate or condone it in any way, and I am very sorry that it occurred in our firm.”

This is all very sad and according to further comments reported in the Telegraph, Mr Holt has noted that some relatively junior former members of staff will face “very serious regulatory sanction”.

Junior employees behaving badly?

On the plausibility scale, the common or garden newspaper reader might conclude, whether correctly or otherwise, that this would rank at about the same level as someone claiming that a series of parties held in their own back garden had never taken place, even though they and their spouse were in attendance and, if anything did happen, some junior heads will have to roll.

It is the tribunal to decide whether this was merely a case of junior employees behaving badly or, as some of them allege, the misconduct was instituted or authorised from a higher level.

This story has reached all of what used to be known as the broadsheets. According to The Guardian, Alistair Wright, a KPMG group senior manager, denied allegations of misconduct relating to Regenersis, in a summary of his position sent by his lawyers.

He admitted “dishonest” conduct in relation to Carillion because he intended “to increase the risk that the […] inspection team would be misled” on when documents had been created, but denied the allegation that the content of the minutes was false or misleading. The subtle distinction that he attempts to draw in the final denial will take some explaining.

More bad news?

Without wishing to get ahead of the game, it seems clear that when the tribunal hears evidence from the FRC and six former KPMG employees, there will be much more bad news for the firm.

Oddly, if the reporting is accurate, no partners will be giving evidence at the tribunal, although that could be a matter of semantics.

The tribunal will make its own judgement on the case and the FRC might also feel obliged to revisit its previous decisions in connection with a whole string of substandard KPMG audits.

If it is proven that staff at KPMG really did forge and fabricate documents, then additionally the police might wish to investigate further, it has been suggested in one news report that the firm could be sued for over £1bn as a result of losses suffered by stakeholders in Carillion.

If those at higher levels in KPMG were aware of any of these issues, then not only should they resign but you have to conclude that they are not fit to act as qualified accountants. If they were unaware, then the firm needs to change policies and procedures in a hurry.

Damaging for the whole profession

This is a very sad tale and should act as a warning to those in charge at accountancy practices.

Many outsiders might make the very reasonable assumption that there are serious cultural problems at a firm which doesn’t even notice when ethical guidelines are broken in what appears to be a regular basis and speculate whether some of the lax behaviour might be mirrored more widely across the profession, especially in audit practices.

That could be very damaging for us all and there is every chance that this column will return to the story once the tribunal decision is published.

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Replies (8)

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By Paul Crowley
13th Jan 2022 22:24

Junior staff unlikely to create forged back dated documents unless encouraged to do so. Shame on the partners for having an ethos that encouraged this.
My guess is that similar missing items may exist on numerous audits, but nobody is checking the other audit papers.

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Replying to Paul Crowley:
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By hfiddes
17th Jan 2022 17:33

There was a time when the auditors I knew and worked with did a really thorough job of auditing with only rare exceptions who left quickly. London office always let the side down a bit compared with the 'provincial' offices and I was never quite sure why but it must have been a combination of getting the staff, being able to get away with things and the moral fibre at the top I supposed. Then we got the big expansion of the profession in the late eighties, the retiral of the generation who'd fought a war and the post war babies who were much more interested in the money and the figures, the move to 'systems-approach' audits, the demand to increase fees, reduce costs or do it better for the same cost and partners who looked at less and less of what was on file. Oh and I forgot to mention, less detailed audit papers (so giving any potential lawyer less to go on) and insurance companies that never let the firm defend its work in court but would settle instead no matter what. Made me despair in the end... and I left decades ago so I dread to think what it is like now.

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By GDavidson
14th Jan 2022 11:45

There but for the grace of God go the partners in all the other big firms.

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By ireallyshouldknowthisbut
14th Jan 2022 12:08

I used to work for KPMG in the mid 90's

I am not overly surprised. The people I trained with are presumably now partner level, and "picking another sample" was rife vs investigating the issues you found. You got on by quickly gathering evidence things where right, not by spending time investigating matters which looked wrong. I was rarely praised for finding issues and getting good report points, but hauled over the coals for going over budget, which happens when you try and audit properly vs not asking too many questions in-case you don't like the answer.

You made manager in the 4th year if your jobs came in under budget and the clients liked you, and above all you didn't embarrass last years audit team by regularly finding things they had missed.

I left on the stroke of 3 years, I was never going to make manager.

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Replying to ireallyshouldknowthisbut:
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By Justin Bryant
14th Jan 2022 14:26

That sums up the basic auditor conflict of interest quite well i.e. he who pays the piper....

All this stuff about how not owing shares in the audit client etc. acceptably reduces any conflict of interest risk is just total nonsense in the face of that basic conflict of interest.

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Replying to Justin Bryant:
By ireallyshouldknowthisbut
14th Jan 2022 14:41

Quite, I think I was rather naive at the time, and I didnt realise my job was keeping my head down & the client sweet. I thought I was supposed to be an auditor!

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By BrianL
15th Jan 2022 12:47

Unfortunately, Philip, you have fallen into their trap by writing that they are the 'crème de la crème of our profession'. People who comment here with disgust at what the big firms do, they are the 'crème de la crème'. Charging excessive fees, having splendid offices and telling people how great you are doesn't make you honest.

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By Justin Bryant
19th Jan 2022 13:30

KPMG did not fare too well recently here either: https://www.accountancyage.com/2021/09/14/loose-regulation-allows-insolv...

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