Financial regulator on trail of Carillion

Headlines about fines levied on the accountants that were supposed to be auditing the accounts of Carillion before its spectacular collapse in 2018 are far from the end of that affair. We await the details that will be revealed by a Financial Reporting Council (FRC) investigation into what happened to allow Carillion’s Board to escape a proper scrutiny that could have saved the public purse many millions of pounds and a lot of honest Carillion employees their jobs. But that is coming, if slowly.

Signs that the FRC are at least on the trail of any guilty parties involved in the Carillion collapse are seen in the fines levied on Carillion’s auditors in June following an FRC Tribunal. ‘Big Four’ auditor KMPG admitted falsifying documents and providing false and misleading information relating to inquiries being made concerning Carillion and has been fined £14.4 Million; costs of £3.95 Million have also been levied so the total amounts to some £18.35 Million. It could have been worse, as KPMG was given a ‘discount’ of some £6 Million for cooperating with the regulator’s inquiry.

The false information was supplied to the regulator when it was carrying out an audit quality review (AQR) on KPMG’s 2016 audit of Carillion and an audit in 2014 of Regenersis, an IT outsourcer.
Several KPMG auditors have been fined and banned from the profession. More trouble might be in store for some of them as a separate investigation into the quality of the auditing of Carillion is underway. Carillion’s liquidators have also launched a £1.3 Billion legal claim against KPMG, which says it will defend this action. Some former Carillion directors could be banned from running UK companies if yet another legal action succeeds.

The Tribunal found misconduct in respect of the Carillion AQR inspection concerning minutes of year-end ‘clearance’ meetings, and an audit working paper on the selection of contracts for audit testing (the CCS Paper), that were presented to the AQR inspectors as having been created during the Carillion audit. But weren’t.

In respect of the meeting minutes the Tribunal found misconduct by KPMG staff through assisting or encouraging the creation of false or misleading meeting minutes, and making false or misleading representations to the AQR inspectors as to when the meeting minutes were created.

Similar findings were made in In respect of the CCS Paper where the tribunal found, among other things, that misconduct had been committed by assisting or encouraging the creation of a false or misleading audit working paper on the selection of construction contracts.

KPMG admitted its liability for the acts of all the individuals and accepts that those acts amounted to misconduct. Whether the audit profession mends its ways and conducts proper audits that might flag up early warnings of farragos like Carillion remains to be seen, but the importance of doing so is summed up by Elizabeth Barrett, Executive Counsel at the FRC, who said: “Misconduct that deliberately undermines the FRC’s ability to monitor and inspect the effectiveness of audits is extremely serious because it obstructs the FRC’s ability to protect the public interest. This case underlines the need for all professional accountants, regardless of seniority, to be aware of their individual responsibility to act honestly and with integrity in all areas of their work.” The same words could be addressed to all construction professionals.

Nick Barrett