KPMG and Carillion: Forgery and Fabricationby
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.
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.