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May 16, 2018

Carillion report slams both auditors and regulators

By Joe Pickard

The Work and Pensions and Department for Business, Energy and Industrial Strategy (BEIS) Committee has called for the Big Four to be potentially broken up in its report into Carillion, which also took aim at the Financial Reporting Council (FRC).

The report found that KPMG, which was paid £29m ($39.1m) to act as Carillion’s auditor for 19 years, did not qualify its audit opinion and complacently signed off the directors’ ‘fantastical’ figures. It stated that because KPMG failed to exercise ‘professional scepticism’ towards company’s accounting judgements it was therefore complicit in them.

What is more, the report said: “In failing to exercise—and voice—professional scepticism towards Carillion’s aggressive accounting judgements, KPMG was complicit in them. It should take its own share of responsibility for the consequences.”

Deloitte, which was paid £10m to act as Carillion’s internal auditors, is said to have failed in a risk management and financial controls capacity. In an earlier committee hearing on Carillion’s fall it was found that Deloitte internal audit partner Michael Jones was not in attendance at some of the auditor committee meetings.

Additionally, EY was paid £10.8m for six months of failed turnaround advice.

The report has recommended that the UK Government should refer the statutory audit market to the Competition and Markets authority and that the review should include consideration of breaking up the Big Four into more audit firms and to separate auditing from other professional services.

In its assessment of the Big Four, the report stated that there are ‘conflicts of interest at every turn’. It noted that although PwC had advised the company, its pension schemes and the Government on Carillion contracts, it was the least conflicted of the Big four.

BEIS Committee Chair Rachel Reeves commented: “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.”

Commenting on the report, University of Sheffield professor of accounting and finance and University of Essex emeritus professor of accounting Prem Sikka said: “The Carillion collapse is just another reminder of crony capitalism that dominates Britain and how their cronyism is protected, shielded, facilitated by the world of accounting.”

The report also found the regulators to be accountable for the failure of Carillion, describing the FRC and the Pensions Regulator as ‘united in their feebleness and timidity’. It was discovered that the FRC, which was described in the report as ‘chronically passive’, had identified concerns with Carillion’s account in 2015 but had failed to follow them up.

The report noted the committee had ‘very little faith in the ability of the FRC to complete important investigations in a timely manner.’ As such, it recommended that all directors who exert influence over financial statements can be investigated and punished as part of the same investigation, not just those with accounting qualifications.

Sikka added: “The FRC is unfit to be a regulator. For any regulator to be effective, the first starting point is it must be independent from those who it regulates. The FRC is not independent of the industry, it is colonised, not only by the personnel from the big firms but their value systems.”

The FRC which has been investigating KPMG’s audit of Carillion has released an update on its investigation due to ‘public interest’ in the matter, however it states that it is uncertain when the investigation will be completed due to the complex nature of the investigation, commenting that it will not ‘cut corners to conclude its investigations as that may compromise the integrity of any enforcement action’.

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