On the fifth anniversary of the collapse of outsourcer Carillion, MPs and audit sector leaders have united in calling on the UK government to push forwards with plans to overhaul the country’s audit sector.
MPs said a shake-up of the country’s accounting industry is needed imminently to ensure that audit failures, such as the one surrounding Carillion’s collapse, are not repeated.
Labour shadow chancellor Rachel Reeves told City A.M. that Carillion’s catastrophic collapse had a major impact on the UK economy in causing thousands of jobs losses and costing taxpayers a “fortune”.
However, following Carillion’s implosion in 2018, eyes quickly turned to the construction firm’s auditor, KPMG, over its failure to spot any red flags when screening the firms accounts.
KPMG still faces a £1.3bn lawsuit – brought forward by Carillion’s liquidators – over claims its “incompetent” work contributed to the building firm’s collapse.
The UK’s accounting watchdog in July also fined KPMG a record £14.4m last year, after the firm and five of its auditors were found to have misled investigators during inspections of its audits of Carillion.
An investigation, opened in 2018 by the UK’s Financial Reporting Council (FRC), into KPMG’s 2014, 2015, and 2016 audits of Carillion is still ongoing. KPMG declined to comment on the ongoing probe.
Nonetheless, the anniversary of the scandal today has led to renewed and widespread calls for an overhaul of the UK’s audit sector to ensure similar accounting failures are not repeated.
A series of high-profile accounting scandals in the years following Carillion’s collapse, involving major companies including Thomas Cook and BHS, have only strengthened the argument for change.
The UK government is, however, yet to complete its planned overhaul, despite having pledged to “revamp” the country’s audit sector and “restore trust in big business”.
The planned reforms are set to see the FRC watchdog replaced with a new, more powerful regulator – called the Audit, Reporting, and Governance Authority (ARGA).
The overhaul will also see the government seek to “tackle” the Big Four’s dominance over FTSE 350 audit work, by forcing them to share those jobs with smaller, challenger firms.
Speaking to City A.M., Darren Jones MP, chair of the UK parliament’s business, energy and industrial strategy (BEIS) committee, called on the government to hurry up with its planned reforms.
“Five years on and we still don’t have the promised legislation to give the regulator the powers it needs to prevent this from happening again,” the Labour MP said. “The regulator is waiting. Parliament is waiting. What are ministers waiting for?” Jones said.
Conservative MP Mark Pawsey told City A.M. that “action on audit reform is overdue” as he called for progress to be made on the draft bill to ensure the UK’s new watchdog has the “the legal powers it needs to do its job effectively.”
Michael Izza, chief executive of the Institute of Chartered Accountants in England and Wales (ICAEW), said there was a lack of urgency in parliament to address the issue.
“Right now, I don’t have a good sense that political will is there,” Izza said, as he warned the draft bill is currently in “limbo”.
Izza, however, said audit reform is not exactly a “vote winner”, assuming that the government has ignored plans to overhaul the sector in favour of other priorities.
The ICAEW chief explained the lack of continuity in the UK government has also hindered progress on audit reform, as he noted the country has had six business secretaries since audit reform first appeared on the agenda following Carillion’s collapse.
Either way, Izza warned the delays to the planned overhaul threaten to hinder the country’s growth. “Is this good for UK Plc? No it isn’t,” the ICAEW chief said.
Outlining the government’s position, business minister Lord Callanan told City A.M.: “The collapse of Carillion made clear that audit and corporate governance needs to improve.”
“That’s why we’ve set out ambitious plans to bring in a new, strengthened regulator and drive significant improvements in corporate transparency.”
He added that “reform is already underway” as he noted the UK government has given the FRC “more powers to ban auditors from reviewing large companies’ accounts where necessary.”
“Strong standards in audit and corporate reporting support growth and jobs across the country – a priority for the Government,” Lord Callanan said.
An FRC spokesperson said it has “made great strides since Carillion” and become a “high-performing regulator.”
“We’ve presided over improvement in audit quality, whilst laying solid foundations for further, sustainable improvements yet to come. But other corporate failures, due to poor audit and governance, have hurt employees, pensioners, investors, and suppliers,” the spokesperson said.
“That’s why establishing ARGA is vital and we eagerly await the legislation to make it happen.”