Britain’s accounting regulator on Thursday fined KPMG a record 21 million pounds ($26 million) for a “textbook failure” in audits of Carillion, the builder that imploded in 2018 and prompted a root and branch review of auditing standards.
The collapse of Carillion, a major government contractor building hospitals and other infrastructure, in January 2018, along with the collapse of retailer BHS two years earlier, led to three government-backed reviews of auditing markets and standards.
The Financial Reporting Council (FRC) said the number, range, and seriousness of the deficiencies in the audits of Carillion were exceptional, resulting in the watchdog’s highest ever fine.
“The collapse of Carillion had a significant and painful impact on employees, pensioners, investors, critical infrastructure projects, local communities and taxpayers,” FRC CEO Richard Moriarty said in a statement.
“Our investigation concludes this was a textbook case study in failure,” Moriarty added.
Failures included not challenging Carillion management, and loss of objectivity.
On occasions, KPMG audit partner Peter Meehan told his team to record his review of working papers without having done a review, the FRC said.
Meehan, no longer with KPMG, was fined 350,000 pounds after a discount to reflect his cooperation and admission of failures.
The total fine for KPMG, one of the world’s “big four” auditors with PwC, Deloitte and EY, relates to two sets of investigations in the audits of Carillion from 2013 to parts of 2017. It would have been 30 million pounds, but was discounted due to admissions and co-operation by the auditor.
Jon Holt, chief executive and senior partner of KPMG in the UK, said the FRC findings were damning, adding the auditor had cooperated fully with the investigation and accepted its conclusions and the sanctions.
“I am very sorry that these failings happened in our firm,” Holt said.
“It is clear to me that our audit work on Carillion was very bad, over an extended period … Since this audit work was undertaken, we have done an enormous amount to improve controls and oversight across our firm, to ensure that these failings could not take place today,” Holt said.
A parliamentary report in 2018 said the collapse of Carillion exposed the “toothlessness” of the FRC. One of the three reviews into auditing recommended replacing the FRC with a more powerful watchdog, though legislation has yet to be tabled to do this.
Moriarty said primary responsibility for Carillion’s collapse was with its directors, but the case also shone a light on the need to modernise audit regulation, and the FRC had made significant changes within its existing powers to improve supervision.
KPMG was fined 14.4 million pounds last year after providing false and misleading information to the FRC during spot checks on audits of Carillion and outsourcing firm Regenersis.
