KPMG receives record £21m fine over Carillion audit

KPMG has been awarded a record £21m fine from the FRC over “exceptional failings” in its audit of Carillion ahead of the firm’s 2018 collapse. The FRC imposed a fine of £26,500,000, reduced by 30% to £18,550,000 to reflect the firm’s co-operation and admissions in regards to to the investigation opened on 26 January 2018 into the statutory audit of the financial statements of Carillion for the financial years ended 31 December 2014, 2015, and 2016, and additional audit work in 2017. Under this decision, former KPMG partner Peter Meehan has also personally been fined £500,000, reduced to £350,000 to reflect his co-operation with investigators. KPMG has also been fined an additional £3,500,000, reduced by 30% to £2,450,000 to reflect the firm’s co-operation and admissions over the investigation opened on 12 February 2019 into the statutory audit of certain transactions relating to the financial statements of Carillion for the financial year ended 31 December 2013. Another partner, Darren Turner, has been fined £100,000 which was reduced to £70,000 for failures in a 2013 audit. The FRC said in its decision, KPMG failed to gather “sufficient appropriate audit evidence to enable it to conclude that the financial statements were true and fair, and failed to consider (adequately or at all) the implications for the audit of evidence suggesting that Carillion’s accounting might have been incorrect or unreliable”. It also added it “failed to conduct its audit work with an adequate degree of professional scepticism. Instead of consistently challenging and scrutinising such audit evidence as it gathered, KPMG failed to subject Carillion’s management’s judgements and estimates to effective scrutiny, even where those judgements and estimates appeared unreasonable and/or appeared to be inconsistent with accounting standards and might suggest potential management bias”. 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.” She added: “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.” Jon Holt, chief executive and senior partner of KPMG in the UK, said: “These findings are damning. We have cooperated fully with the investigation, and we accept its conclusions and the sanctions that have been imposed without reservation. I am very sorry that these failings happened in our firm. “It is clear to me that our audit work on Carillion was very bad, over an extended period. In many areas, some of our former partners and employees simply didn’t do their job properly. Junior colleagues were badly let down by those who should have set them a clear example, and I am upset and angry that this happened at our firm. “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. But ultimately it still falls to each of us, individually, to hold ourselves and each other to the highest professional standards every day. “As an auditor, I simply cannot defend the work that we did on Carillion. As the Chief Executive of KPMG, I am determined that we face up to this failure, and I am absolutely committed to continuing to work with my colleagues across the business to ensure that nothing like this can happen again.”