Jessica Fino 13 Feb 2018 12:04pm

Big Four “feasting” on Carillion “carcass”, say MPs

The Big Four have been accused by MPs of “feasting” on the “carcass” of Carillion after receiving a combined total of £71.6m in fees
Caption: KPMG, PwC, Deloitte and EY received a combined total of £71.6m for their work with the troubled company

The Work and Pensions and Business, Energy and Industrial Strategy Committees asked KPMG, PwC, EY and Deloitte to outline their involvement with Carillion over the last 10 years.

Last month Carillion filed for compulsory liquidation after talks with potential lenders failed, putting thousands of jobs and businesses at risk.

After receiving letters from the four firms, the joint committees revealed that KPMG was paid a total of £20.2m for its work on Carillion since 2008, with £16.8m coming from the company itself and £3.4m from government work.

PwC was paid most of the four firms in fees. It got paid a total of £21.1m, with £8.5m from Carillion, £6.5m from government and £6.1m from pension schemes.

Frank Field, chair of the Work and Pensions Committee, said PwC “managed to play all three sides” and is now being paid to work as special managers.

“It was perhaps telling that, with their three fellow oligarchs conflicted, PwC were appointed to this lucrative position without any competition,” he added.

The Official Receiver (OR) told the committee that PwC were the only option to appoint as special managers to administrate the insolvency because they were the only one of the “oligopoly” of firms who would not have an immediate conflict of interest.

The OR said it has been granted £150m of public funds to run the Carillion liquidation.

EY was paid £18.3m from Carillion over the last 10 years (£15.6m from the company and £2.7m from government) and Deloitte was paid £12m (£10.3m coming from the company and £2.7m from government).

The committees also pointed out that the past three Carillion chief financial officers were ex-Big Four. Richard Adam and Emma Mercer, the most recent CFO, previously worked at KPMG, while Zafar Khan and audit chairman Andrew Dougal worked for EY in the past.

Field responded to the Big Four’s disclosures by saying, "The image of these companies feasting on what was soon to become a carcass will not be lost on decent citizens. We saw at the end of our evidence session that the former directors of Carillion are, unlike their pensioners, suppliers and employees, alright. These figures show that, as ever, the Big Four are alright too. All of them did extensive – and expensive – work for Carillion.”

KPMG is the firm at the centre of the Carillion controversy, as it was the its auditor since 1999, at the time of its profit warnings and consequent collapse.

The Financial Reporting Council (FRC) is currently investigating the firm, covering the years of 2014, 2015 and 2016 and additional audit work carried out in 2017.

KPMG said in its response letter to the committee that it welcomes the FRC probe and believes “it is important that regulators acting in the public interest review the audit work related to high profile cases such as Carillion”.

Speaking exclusively to economia, Bill Michael, KPMG chairman, stood by the firm’s audit work at Carillion and said he welcomed the investigation.

The letter also revealed 14% of all contracts were making a loss at the end of 2016 and that KPMG reduced its audit fees from £1.8m to £1.4m between 2008 and 2016 despite its hourly fees increasing.

The joint committees pointed out that KPMG’s letter suggested that the firm did not press Carillion to disclose further information about adopting the new revenue recognition standard, despite the FRC stating in October 2016 that it expected most companies to have made "substantial progress in their implementation of these standards".

Rachel Reeves, chair of the BEIS committee, said, "KPMG has serious questions to answer about the collapse of Carillion. Either KPMG failed to spot the warning signs, or its judgement was clouded by its cosy relationship with the company and the multi-million pound fees it received.

“For the sake of all those who lost their jobs at Carillion and in the interests of better corporate governance, KPMG should, as a bare minimum, review its processes and explain what went wrong,” added Reeves.

Responding to the committees’ comments, a KPMG spokesperson said, “We take the questions that have been asked of our profession in recent weeks very seriously and we welcome the opportunity to appear before the joint committee on 22 February and assist the inquiry with their investigations.”

PwC also responded by saying, “It’s appropriate that the joint committee consider all aspects of the collapse of Carillion and we will continue to cooperate fully with their enquiries.

“The joint committee’s request for information dates back to 2008 and the majority of the work that PwC undertook directly for Carillion was carried out prior to June 2015 rather than in the last few months before its collapse.

“While there are only four large professional services firms, the market has been subject to extensive review by the Competition Commission (now succeeded by the Competition & Markets Authority) and European Commission. We comply with all rules that have resulted from these extensive reviews.”

EY and Deloitte declined to comment. However, EY explained in its letter to the committees that a senior team from the firm was brought in to work with Carillion’s new management team following the profit warning in July 2017. The team aimed at finding a solution that would allow Carillion to operate on a sustainable basis.

Steve Varley, UK chairman at EY, said in the letter, “We are saddened that such a solution could not be found and are very conscious of the impact the company’s collapse has had on its pensioners, employees, suppliers, sub-contractors and on those who rely on the services which they were providing. We therefore understand your concerns and the need to conduct this inquiry in a timely fashion. We believe it is important to ensure lessons are learnt from this matter.”

You can read our full interview with KPMG chairman Bill Michael here.