KPMG has been fined £21m for “serious breaches” in its audits of Carillion’s financial statements.
The consultant failed to comply with “the most basic and fundamental auditing concepts” when it signed off on Carillion’s annual financial statements across three sets of accounts between 2014 and 2016, according to the regulator the Financial Reporting Council.
Carillion collapsed in January 2018 with around £7bn of liabilities and just £28m in cash. Three of its former directors have been sanctioned by the Insolvency Service, which said Carillion’s pre-collapse financial statements hid the extent of losses on major projects and therefore its “serious and deteriorating situation financial”.
FRC chief executive Elizabeth Barrett said: “The number, extent and seriousness of the deficiencies in Carillion’s audits in the period leading up to its failure were exceptional and undermined that credibility and the public confidence in auditing”.
The FRC made two findings against KPMG.
First, it found that KPMG had not gathered sufficient evidence to enable it to conclude that Carillion’s financial reports in 2014, 2015 and 2016 were true and fair.
He particularly condemned KPMG’s report on Carillion’s financial position in 2016. “KPMG… failed to respond to numerous indicators that Carillion’s core operations were loss-making and that it was relying on short-term and unsustainable measures to support their cash flows,” he said. .
The ruling adds that Carillion’s importance as a KPMG client risks undermining the auditor’s ability to be objective.
“This very large company … was not subjected to rigorous, comprehensive and reliable audits during the three years prior to its demise,” the ruling said.
KPMG was fined £18.5 million for this breach and must take corrective action to prevent similar breaches from occurring again. Peter Meehan, a partner on the KPMG audit engagement during those years, was fined £350,000 and barred from membership of the Institute of Chartered Accountants in England and Wales for 10 years.
The second finding related to misleading accounts submitted by Carillion in 2013. The contractor had treated different transactions with the same outsourced IT provider as independent of each other, leading to a significant increase in reported profits for the year. The FRC ruled that KPMG “failed to approach the audit of these transactions with an appropriate degree of professional scepticism”.
KPMG Audit, a subsidiary of KPMG, was fined £2.5m for this breach. Darren Turner, audit partner for the year ending 2013, was fined £70,000.
KPMG would have been fined a total of £30m for the two breaches, but this was reduced by 30% due to the firm’s co-operation. KPMG must also pay the £5.3m cost of the investigation.
