KPMG failed to meet ‘the most basic’ concepts in audits of Carillion says FRC

KPMG has been fined £21m as the Executive Counsel of the Financial Reporting Council (FRC) brings to a close her investigation into the audits of Carillion.

Carillion employed 18,000 people in the UK when it collapsed into liquidation in January 2018 with liabilities of almost £7bn. The construction firm was building One Chamberlain Square in Birmingham when it collapsed.

Elizabeth Barrett, Executive Counsel said the KPMG failed to adhere to the “most basic and fundamental audit concepts” in its audits of collapsed construction firm Carillion.

She said: “Its failure was exceptional and undermined that credibility and the public trust in audit”.

The FRC has now issued its final settlement notices on KPMG and two former audit partners, after hitting the firm with a record fine of £30m in October, which has been reduced by 30% due to its co-operation and admissions.

Former partner Peter Meehan received a £500k fine, which has been reduced to £350k, as well as an exclusion from membership of the ICAEW for ten years after he failed to ensure that the audit engagement was properly managed and supervised.

Darren Turner was given a £100k fine which has been dropped to £70k. The FRC says Turner and KPMG did not obtain sufficient, appropriate audit evidence to satisfy themselves that an accountancy treatment was appropriate when KPMG changed its provider of outsourced IT and business process services.

KPMG will also pay Executive Counsel’s costs of both investigations which amount to more than £5.3m. Both the firm and Meehan and Turner will have to make a statement saying that Carillion audits weren’t satisfactory – as well as ensure that the mistakes made don’t happen again in the future.

Elizabeth Barrett, Executive Counsel said: “The credibility of reports and opinions issued by auditors in connection with financial statements depends upon beliefs concerning the integrity, objectivity and independence of auditors and the quality of the audit work performed.

“The number, range, and seriousness of the deficiencies in the audits of Carillion during the period leading up to its failure was exceptional and undermined that credibility and the public trust in audit. This is reflected in the financial sanction imposed on KPMG LLP, the highest ever imposed by the FRC.

“Many of the breaches involve failing to adhere to the most basic and fundamental audit concepts such as to act with professional scepticism and to obtain sufficient appropriate audit evidence. The breaches in relation to the 2016 audit even include failing to ensure that the audit process itself was properly managed and that the audit file was a reliable record. These requirements lie at the heart of proper auditing.

“The seriousness of the failings in the 2016 audit is compounded by the breaches of the Ethical Standards relating to the fundamental principles of objectivity, independence, and integrity.

“The non-financial sanctions imposed on KPMG LLP are focused on ensuring that failures on this scale will never be repeated.”

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