Carillion collapse: FRC to investigate KPMG over audit work

The Financial Reporting Council (FRC) has opened an investigation into KPMG’s audit work for embattled construction company Carillion, which entered into compulsory liquidation earlier this month.

The investigation, which was sparked by enquiries made since Carillion’s profit warning in July 2017, will cover the years ended 31 December 2014, 2015 and 2016, and additional audit work carried out during 2017.

KPMG signed off on Carillion’s financial statements in March despite the company issuing a profit warning four months later prompted by a £845m write-down in the value of its contracts. Following the revelations of sharp rises in debt, the company hired EY to review its finances.

The watchdog will determine whether KPMG breached any audit requirements, particularly ethical or technical standards.

The FRC confirmed it would examine several areas of KPMG’s work, including “the audit of the company’s use and disclosure of the going concern basis of accounting, estimates and recognition of revenue on significant contracts, and accounting for pensions”.

The FRC said it hopes to “conduct the investigation as quickly and thoroughly as possible.”

KPMG said it had conducted its role as Carillion’s auditor “appropriately and responsibly” but would co-operate with the investigation fully.

This investigation will run alongside the FRC looking into “the conduct of professional accountants within Carillion in connection with the preparation of the financial statements and other financial reporting obligations under the Accountancy Scheme.”

The FRC said it is liaising closely with the Official Receiver, the Financial Conduct Authority, the Insolvency Service and The Pensions Regulator to ensure a cohesive approach in the investigations.

MPs from the Business, Energy and Industrial Strategy and Work and Pensions select committees were reported to have written to all Big Four firms asking for clarity on any work carried out by them for Carillion.

Partners from PwC have been appointed as special managers to assist with the company’s liquidation. The firm has also been advising the government on Carillion’s pension liabilities.

Carillion’s collapse has wide implications for the public sector, as the company held several outstanding government contracts including for the HS2 rail, NHS hospitals and prison facilities.

The government’s actions surrounding the collapse have also been called into question, particularly why contracts worth £2bn were awarded to Carillion after it issued three profit warnings.

Here are some steps companies can take to avoid a Carillion collapse.