A joint committee of MPs has attacked the Big Four accountancy and audit firms in a response to their enquiries into failed government outsourcing firm Carillion.
MPs accused the firms of “feasting on what was soon to become a carcass”, as their enquiries revealed that the Big Four had charged £71.6m for work relating to Carillion in the ten years leading up to its financial collapse.
All four firms were asked to provide responses to questions from the committee, which issued the following breakdown of work:
‘Serious questions to answer’ for KPMG
KPMG came in for particular criticism, having audited Carillion’s accounts every year since the company’s inception in 1999, receiving £29.4m in fees in the process.
Rachel Reeves, chair of the business, energy and industrial strategy (BEIS) committee, said: “KPMG has serious questions to answer about the collapse of Carillion. Either KPMG failed to spot the warning signs, or its judgment was clouded by its cosy relationship with the company and the multi-million-pound fees it received.”
KPMG was also asked additional, in-depth questions with regard to their last audit of the 2016 accounts, when Carillion was signed off as a “going-concern” only to announce a £845m contract write down and profit warning months later, before going into liquidation on 15 January 2018.
The firm will be questioned in more detail in Parliament on 22 February and is likely to be pressed on the valuation of goodwill, which represented 73% of the value of Carillion’s assets in 2016.
In its response, KPMG stated that it did not accept any suggestion of blame, and asserted it conducted its work “appropriately and responsibly”.
“It does not follow automatically from a company collapse either that the opinion of management was wrong, or that the auditor did a bad job,” commented KPMG chairman and senior partner Bill Michael.
The FRC is to investigate the accounting firm over its role in Carillion’s collapse. In 2017 the accounting watchdog’s “audit quality inspection” of KPMG raised several weaknesses, stating that it should:
- Improve the extent of challenge of management in relation to areas of judgment, in particular impairment reviews, loan loss provisions and other valuations.
- Re-assess the firm’s approach to the audit of revenue and the related training provided.
- Strengthen the firm’s audit approach for corporate entities in relation to defined benefit pension scheme assets and membership data.
- Improve the accuracy or precision of the description of audit procedures performed in auditors’ reports.
PwC playing ‘all three sides’
Fellow Big Four player PwC also came under the microscope, with the firm’s role as special managers of Carillion for the official receiver highlighted as an example of the dominant position held by big firms.
A letter from the official receiver published today indicates that PwC was the only option to administrate the insolvency because they were the only one of the ‘oligopoly’ of firms who would not have an immediate conflict of interest.
In evidence to the committee John Manzoni, chief executive of the civil service, said that the receiver has been granted £150m of public funds to run the Carillion liquidation, adding that the final cost to the taxpayer could be more or less than that, depending on how much the OR manages to claw back from selling on Carillion’s contracts.
“PWC managed to play all three sides – the company, pension schemes and the Government – to the tune of £21m and are now being paid to preside over the carcass of the company as Special Managers,” said Frank Field, chair of the work and pensions committee. “It was perhaps telling that, with their three fellow oligarchs conflicted, PWC was appointed to this lucrative position without any competition.”
Public sector contracts
The committees’ response coincides with news that the value of new UK public sector contracts awarded to KPMG has dropped by almost 80% since 2015.
The Financial Times reported that KPMG won public sector contracts worth £12m last year compared with £22m in 2016 and £55m in 2015, amid a series of high-profile scandals for the firm, including a South African corruption scandal and an investigation into its audit of Rolls-Royce.