MPs investigate Big 4’s role in Carillion collapse

The Big 4 accountancy firms are to be quizzed by MPs for their dealings with Carillion prior to the firm’s collapse earlier this month.

The Work and Pensions and Business, Energy and Industrial Strategy Committees have written to the heads of KPMG, EY, PwC and Deloitte, asking for detailed accounts of any and all services the firms have offered Carillion, its subsidiaries and its pension scheme, over the last 10 years, and what fees they were paid.

The committees said there had been conflicting reports as to the extent of the involvement of the four firms’ provision of professional services to Carillion, over various issues and transactions, and the committees said they want to establish a clear timetable setting out who was involved, in what, and when.

The committees said that in the case of KPMG, it was known that the firm had audited Carillion’s accounts every year since the company’s inception in 1999, receiving £29.4m in fees in the process.

The latest set of Carillion’s audited financial accounts were signed off by KPMG with an unmodified opinion in March 2017, only for the company to go bust nine months later.

In light of this dramatic turn of events, the committees said they had a series of additional specific questions for KPMG.

In their letter to KPMG chairman Bill Michael, the committees state: “In light of Carillion’s collapse, have KPMG conducted a cold review of their 2016 audit? If so, do KPMG stand by their audit opinion that gave Carillion’s consolidated accounts a clean bill of health?

“Your 2016 audit opinion noted the risks relating to estimates around revenue recognition from contracts, but concluded that there was no material misstatement in the accounts. Yet three months later, a KPMG-led review of Carillion’s contracts resulted in a £845m provision relating to these contracts. KPMG’s 2016 audit opinion outlines in detail the audit work conducted on these contracts, but concluded no provision was required. What changed?

“Accounting standards require that the total loss of a contract is recognised if it is deemed that the contract is loss-making. What proportion of Carillion’s contracts were loss-making to financial year-end 2016? Were KPMG satisfied that all lossmaking contracts were fully recognised at that point?

“The 2017 interim financial statements concede that there likely would have been a further hit to the company’s reserves of around £125-150m when IFRS 15 (a new international financial reporting standard relating to revenue recognition) was expected to be retrospectively adopted on 1 January 2018. The financial statements in 2016 noted that this standard would be adopted on that date but said only it was ‘difficult to determine with any certainty the impact on revenue’ this would have. This standard was introduced in part to guard against companies aggressively recognising contract revenue, so why were KPMG not more proactive in highlighting the risk this presented in the 2016 accounts?

“The accounts show that the pension schemes suffered a £725m actuarial loss due to changes in financial assumptions. This accounts for more than 90% of the total net pension liability. What work did KPMG to verify the validity of the actuarial assumptions?

“Goodwill, at £1.57bn, is the largest single item on the balance sheet, and represented over 70% of the groups non-current assets. Given the inherent uncertainty in valuing such an intangible asset, did KPMG form a view as to whether this reliance on goodwill was sustainable in the long-run?”

Additionally, the committees said they would be looking at what advice and assurances the Government were given about the contracts they had entered into with Carillion.

“Could you therefore provide similar details about any advisory services that your firm may have entered into with the Government relating to contracts with Carillion and its subsidiaries. We would also like this information dating back to the start of 2008,” adds the letter.

The four firms are expected to provide a full reply by Friday (February 2).

In a further development, the Financial Reporting Council (FRC) said it had decided, following enquiries made since Carilion’s first dramatic profit warning last July, to open an investigation under the Audit Enforcement Procedure in relation to KPMG’s audit of Carillion.

The investigation will cover the years ended December 31, 2014, 2015 and 2016, and additional audit work carried out during 2017.

The investigation will be conducted by the FRC’s Enforcement Division and will consider whether the auditor breached any relevant requirements, in particular the ethical and technical standards for auditors.

Several areas of KPMG’s work will be examined 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 will conduct the investigation as quickly and thoroughly as possible.

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