Tuesday 22 January 2019 9:49 am

Watchdog investigation into KPMG’s Carillion audit at ‘critical stage’

The UK’s audit watchdog said its investigation into KPMG’s audit work for collapsed construction giant Carillion is at a “critical stage”.

The Financial Reporting Council (FRC) issued an update this morning on its probe into the Big Four firm following “significant public interest” in the case.

Carillion’s collapse in January last year has become a flashpoint for criticism of the audit industry, with a particular focus landing on external auditor KPMG for its alleged failure to sound the alarm over the outsourcer’s significant debts.

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The FRC said: “A key area of focus has been the financial performance of Carillion’s major contracts in both the construction and services divisions, and whether Carillion management and its auditors ensured that this was appropriately reported in its financial statements.”

“The investigations are also considering conduct relating to pension liabilities, goodwill, cash disclosures and going concern,” it added.

Last week, KPMG confirmed that it had suspended the audit partner with overall responsibility for Carillion, Peter Menshan, along with three other non-partner members of the auditing team, over concerns documentation provided to the regulator had been backdated.

Big Four Accounting Firms Come Under Government Scrutiny
KPMG has suspended its top partner with responsibility for Carillion (Source: Getty)

A further investigation into documents provided to the FRC by KPMG was opened in November, after the audit firm self-reported potential issues with its submission to the watchdog’s audit quality review (AQR).

A KPMG spokesperson said: “Over the past year, we have been performing a thorough review of the firm’s audit of Carillion. Our investigation included the audit team’s response to the FRC’s AQR undertaken during 2017, which looked at aspects of the 2016 audit.”

“Concerns were identified in connection with a small number of documents provided to the FRC’s team during the routine AQR,” they added.

“On discovery of this information, we immediately reported our findings to the FRC. It is important to note that this took place after the signing of the audit opinion and we have not identified any evidence or indication that it had any impact on the audit conclusions of Carillion. At this stage the investigation is ongoing and as such, the firm has reached no conclusion around individual responsibility.

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“We are taking this matter extremely seriously and have engaged outside legal counsel to conduct an investigation into the circumstances of the AQR and the conduct of the individuals involved. We acted swiftly and decisively and will continue to take all necessary steps to deal with this, including cooperating fully with the FRC.”

Reacting to the suspensions, Work and Pensions Select Committee chair Frank Field said: “That there has been egregious wrongdoing at every stop on this gravy train is, sadly, no longer news. So back to the real story – where are the law changes that will stop these directors and their merry bands of advisers, auditors and hangers on richly lining their own pockets at a cost of billions: in lost jobs, in decimated pensions, in ruined small businesses and stalled public services?”

He added: “We know what went wrong. We have known it, and been saying it, for years. When are the government and the regulators going to put it right?”

The FRC said it was examining “very significant quantities of documents”, and planned further interviews with KPMG and Carillion employees early this year. It said it was “committed to completing its investigations promptly and thoroughly”, but added that the “complex” investigation would continue “well into 2019”.