Jessica Fino 29 Jan 2018 10:04am

KPMG investigated over Carillion audit

The Financial Reporting Council (FRC) has launched an investigation into KPMG’s audit of collapsed Carillion

The regulator said its decision to investigate the Big Four firm followed enquiries made since a profit warning in July last year, and will cover the years of 2014, 2015 and 2016 and additional audit work carried out in 2017.

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

KPMG has been Carillion’s auditor since its inception in 1999.

The FRC said its enforcement division will examine whether KPMG has breached any ethical and technical standards for auditors, looking at the firm’s work in areas such as the audit of the company’s use and disclosure of the going concern basis of accounting, estimates and recognition of revenue on significant contracts, and accounting for pensions.

In July last year, Carillion announced that, following a review of its material contracts with the support of its auditor, it had written off £845m by 30 June.

As a result, it warned it was issuing a revised full-year forecast, with revenue likely to be down to between £4.8bn and £5bn and overall performance below management’s previous expectations.

In November, the group was forced to issue another profit warning and disclose that it expected to be in breach of its financial covenants by 31 December.

The regulator said on Monday it would be running the investigation “as quickly and thoroughly as possible” by conducting “urgent enquiries”.

It added it was working closely with the Official Receiver, the Financial Conduct Authority, the Insolvency Service and The Pensions Regulator to make sure there was a join-up approach to the probe.

A KPMG spokesperson said, “We believe that we conducted our role as Carillion’s auditor appropriately and responsibly.

“Transparency and accountability are vital in building public trust in audit. We believe it is important that regulators acting in the public interest review the audit work related to high profile cases such as Carillion. We will co-operate fully with the FRC’s investigation.”

Michael Izza, ICAEW chief executive, reacted to the FRC’s decision by saying, “It is vital that we are able to have confidence in audit and financial statements. Cases such as this undermine that trust so it is right and proper that they should be investigated - and swiftly.

"If there are lessons that need to be learned, whether by auditors, the accountancy profession, or management, we must identify them and act. Society needs to be able to have trust in business. It is the job of all of us to work together to enable this to happen."

MPs have accused Carillion of avoiding to pay into the pension schemes while carrying on paying shareholder dividends and bonuses to its bosses.

Last week, the FRC, Carillion’s directors and the Insolvency Service were hauled before the Department for Business, Energy & Industrial Strategy and Work and Pensions Committees. They will be questioning how Carillion entered into liquidation with a reported £5bn of liabilities one year after KPMG signed off its accounts as a going concern.