‘Nothing has changed’: Two years on from Carillion collapse

Despite promising to have the first stage of its investigation into KPMG’s auditing of the outsourcing giant finished, the Financial Reporting Council this week said it needs another six months.

The investigation, the initial part of which is now due in the summer, spans a four-year period, has proven so complex the regulator has brought in outside counsel as it continues to sift through “a huge volume of documents and information”.

“The scale of the task of analysing the collapse of a massive complex enterprise is more complicated than was anticipated and then there is the difficulty and some would say unwillingness to assert auditing failure,” said Patrick Elliot a corporate recovery and insolvency specialist at Keystone Law.

Stuttering programme

Further delays have done little to quell feeling within the accounting sector that appetite for reform is waning, despite a busy 2019 in which multiple reviews and investigations ran concurrently.

In July, Andrea Leadsom replaced Greg Clark as business secretary and two months later closed the department’s consultation on the CMA’s proposals without outlining any future plans. Last month Sir John Kingman, who has overseen a separate bid to replace the Financial Reporting Council also criticised the UK government for making only a passing reference in the Queen’s Speech to his proposals.

Andrew Tyrie, chairman of the Competition and Markets Authority (CMA) and one of the most vocal proponents of splitting up the Big Four and separating the functions of audit and accounting, has reportedly held private dinners with the chairman of KPMG, EY, and other industry leaders, on these matters.

“There have been calls for reform to the auditing industry for numerous years, particularly for the split of auditing and non-auditing services provided by the accounting firms,” said Elliot. “Any suggestion of auditing failure at a business the size of Carillion would turn out to have significant political consequences and would need to be uncontestable.”

In April, the CMA said immediate legislation was needed to end the dominance of the Big Four, KPMG, EY, Deloitte and PwC, in order to avoid a repeat of such scandals as the demise of Carillion.

‘Exceptional scale and complexity’

The company, which employed 43,000 people to provide services in defence, education, health and transport, became the largest construction bankruptcy in British history when it went under in January 2018.

It left creditors and the firm’s pensioners facing steep losses and put thousands of jobs at risk. An initial report published by lawmakers in June 2018 said the government’s overriding priority for outsourcing had been spending as little money as possible while forcing contractors to take unacceptable levels of financial risks.

Investigators are reviewing “a substantial volume of material”, the FRC said, including the audit work papers, documents produced by Carillion and third parties such as internal auditors and external advisors, and emails and other correspondence.

This covers the years ending 31 December 2014, 2015 and 2016, and additional audit work carried out during 2017.

The regulator has also conducted a series of detailed interviews, and an independent expert is considering that analysis in order to provide an expert opinion on whether there were breaches of auditing standards.

“We are also taking advice from external counsel and we continue to cooperate to the fullest extent permissible with other regulators pursuing parallel investigations,” the FRC said. “The scale and complexity of this case is exceptional, with a huge volume of documents and information that has had to be reviewed and analysed.”

On the anniversary of the collapse, former chair of the Business, Energy and Industrial Strategy Committee Rachel Reeves MP, pulled no punches, stating, “nothing has changed” as she laid into the auditor, the company and the government.

“The government has failed to reform auditors, failed to give regulators powers and make them use them, and failed to end its obsession with outsourcing public services,” said Reeves, who oversaw the initial government response to the liquidation.

She said the “recklessness and greed” of the directors was “enabled by an audit industry complicit in a systematic manipulation of Carillion’s accounts” that allowed it to paint an imaginary picture of its finances when alarm bells should have been ringing.

“KPMG was paid £29m to be Carillion’s auditor for 19 years, and signed off Carillion’s accounts year after year,” Reeves said. “As debts and deficits ballooned, it complacently signed off Carillion’s figures without qualification. “

Carillion’s board deliberately chose not to make adequate contributions to its pension schemes, Reeves said, adding that the firm’s finance director of 10 years, Richard Adam, considered them a “waste of money”.

The FRC is investigating the conduct of Adam, along with Zafar Khan, another group finance director, in connection with the preparation of financial statements during the relevant period, alongside its probe into KPMG.

“Disaster happened with Carillion and it will happen again if changes aren’t made now,” Reeves said.

Ring-fencing operations

One of the suggestions floated by Tyrie is to “ring-fence” the operations of audit and accountancy within large firms. Reforms promoted by Tyrie following the 2008 financial crisis forced British banks to split their investment and retail arms in such a manner, as to cut risk and remove the possibility that the public would have to pick up the bill should the investment side go under.

“Big accounting firms have a history of using financial/political resources to dilute reforms,” said Prem Sikka, Professor of Accounting at the University of Sheffield, and Emeritus Professor of Accounting at the University of Essex.

“They have been delivering dud audits, engaged in tax avoidance and insolvency abuses for decades and govts have done nothing. Ordinary people pay the price of this corrupt indulgence.”