Jessica Fino 16 May 2018 11:01am

MPs call for Big Four break-up over Carillion

In a scathing report into Carillion MPs accused the Big Four of being “complicit” in its collapse
Caption: The Big Four firms were “guilty of failing to tackle the crisis” at Carillion, the committees said

The report said that Carillion exposed the UK’s audit market as a “cosy club incapable of providing the degree of independent challenge needed”, and recommended the government should refer the statutory audit market to the Competition and Markets Authority (CMA).

The damning findings from the Department for Business, Energy & Industrial Strategy (BEIS) and Work and Pensions committees also strongly criticised the role of accountancy watchdog the Financial Reporting Council (FRC).

The Big Four firms were “guilty of failing to tackle the crisis” at Carillion, “prioritising their own profits ahead of good governance at the companies they are supposed to be putting under the microscope”, said Rachel Reeves, chair of the BEIS committee.

Possible outcomes of this review could include spinning off the audit arms of the Big Four, or splitting audit functions from non-audit services, the committees said.

It added that the lack of competition in the audit market “creates conflicts of interest at every turn”.

KPMG was singled out for failing to question Carillion’s financial judgements and information, being “complicit” in the company’s “questionable” accounting practices and “complacently signing off its directors’ increasingly fantastical figures” over its 19-year tenure as Carillion's auditor.

Deloitte was Carillion’s internal auditors and EY was tasked with turning the company around. PwC also advised the company, its pension schemes and the government on Carillion contracts.

PwC was appointed the administrators of Carillion after its collapse. The official Receiver explained at the time that PwC was the only one of the “oligopoly” of firms who would not have an immediate conflict of interest. However, the firm was paid more than the other firms in fees. It received a total of £21.1m, with £8.5m from Carillion, £6.5m from the government and £6.1m from pension schemes.

MPs accused the FRC of being “far too passive” in relation to Carillion’s financial reporting, saying Carillion’s collapse exposing the “toothlessness” of the regulator and its reluctance to use aggressively use its the powers.

As a result, the committees claimed to have “no confidence in our regulators”. They said the FRC and the Pensions Regulator (TPR) were “united in their feebleness and timidity” and “too reactive.”

“The auditors should also be in the dock for this catastrophic crash,” said Reeves. “They are guilty of failing to tackle the crisis at Carillion, failing to insist the company paint a true picture of its crippling financial problems. The sorry saga of Carillion is further evidence that the Big Four accountancy firms are prioritising their own profits ahead of good governance at the companies they are supposed to be putting under the microscope,” she added.

"KMPG, PwC, Deloitte and EY pocket millions of pounds for their lucrative audit work - even when they fail to warn about corporate disasters like Carillion. It is a parasitical relationship which sees the auditors prosper, regardless of what happens to the companies, employees and investors who rely on their scrutiny. The Competition and Markets Authority must now look at the break-up of the Big Four accountancy firms to help increase competition and deal with conflicts of interest.”

The 101-page report looked into how the construction company was forced into liquidation earlier this year after several profit warnings. The company had nearly £7bn in liabilities when it collapsed.

Frank Field, chair of the Work and Pensions Committee, said Carillion’s directors were “too busy stuffing their mouths with gold” to show any concern for the welfare of their workforce or their pensioners.

The report claimed Carillion became “a giant and unsustainable corporate time bomb”, with the individuals who failed in their responsibilities, in running Carillion and in challenging, advising or regulating it, often acting entirely in line with their personal incentives.

It also warned that Carillion “could happen again, and soon”.

ICAEW chief executive Michael Izza told the BBC’s Today program, “It's a watershed moment. If we don't fix this I don't think we'll have a profession in 20 years time.”

Firms need to tighten practices and use technology to "do things in a very different way", he added.

Response from Big Four and regulators

KPMG defended itself by saying, “We believe we conducted our audit appropriately. However it’s only right that following a corporate collapse of such size and significance, the necessary investigations are performed. Auditing large and complex businesses involves many judgements and we will continue to cooperate with the FRC’s ongoing investigation.

“We welcome any future review of our profession. We all want to be part of a better environment, build trust in our profession and learn from experience. If we consider how the profession has changed in the last decade – and indeed the changes we expect to see over the next five to 10 years – it is clear there is a need for us to look closely at our business models.

“We believe there are clear benefits of being a multi-disciplinary firm, but we also recognise the growing challenges that this structure presents and the importance of managing these to ensure public trust.”

Meanwhile, Kevin Ellis, chairman and senior partner at PwC, said that while “competition in the large company audit market is fierce,” the firm “would welcome more players to boost choice”.

He added, “Recent audit reforms have had a positive impact on audit quality, driven innovation and strengthened the position of audit committees, but are not increasing choice. This is a market issue, driven by the complexity of large international businesses which require significant size, scale and expertise in their auditor. Currently it appears the level of investment required and risk and regulatory scrutiny involved has not made it an attractive enough proposition for other players."

Deloitte reacted to the report by saying, “We recognise the concerns raised by the Select Committees about the concentration of the audit market. We believe that a scale, multi-disciplinary model is absolutely essential to provide the range of skills and expertise needed to deliver high quality audits in the public interest. Audit-only firms would reduce audit quality and be detrimental to investors and the capital markets. Any solution needs to reflect the global marketplace and not damage the UK’s position as an attractive capital market.”

EY declined to comment.

The FRC, which also today published an update into its own Carillion investigation, said, “We note the committee’s statement that our powers should be extended. We look forward to the conclusions reached by Sir John Kingman’s review and the government regarding any new powers that we might be given.”

The CMA said it is working closely with the FRC. “As part of this, we are actively monitoring the impact of the remedies put in place following the Competition Commission’s inquiry. The CMA remains open to looking further at the audit sector itself and will work with the FRC in support of any action it chooses to take,” it added.

FRC chief executive Stephen Haddrill has previously said that the CMA should look into possibility of “audit-only” firms in a bid to enhance competition in the sector, while Andrew Tyrie, the new chair of the CMA, hinted that the “competition aspect” of the Big Four is “certainly” something that needs to be looked at.