Update on Carillion: FRC continue investigating KPMG for 2014-17 audits of construction company

The Financial Reporting Council (FRC) said today that it is investigating KPMG’s Carillion audits conducted between the years 2014 and 2017.

The regulatory body is also looking into the conduct of two former finance directors of the construction business, Richard Adam and Zafar Khan.

Over one year on from Carillion’s collapse, questions remain over how the business’s accounts changed so dramatically between March 2017 and its collapse in July of that year.

In November last year, the FRC opened another investigation. It was linked to KPMG’s provision of materials to the FRC in connections with its Audit Quality Review which assessed the audits of Carillion in 2016.

This particular investigation was actually opened because of matters self-reported by KPMG.

The original investigation into Carillion’s collapse continues on, lead by the FRC and other regulators.

Its key focus area has been the financial performance of Carillion’s major contracts in the construction and service divisions. There are questions over whether this was reported properly in Carillion’s financial statements.

Interestingly the investigations are now also extending into areas including pension liabilities, goodwill, cash disclosures, and going concern.

So what is happening now? The FRC has recently obtained and started to analyse huge quantities of documents which fall under the above areas.

Interviews have already been conducted with KPMG audit team members and Carillion senior-level executives. Further interviews will go ahead in the coming weeks.

Many ask why this investigation is taking so long. The answer lies in its complexity. It is predicted that it will not be completed until at least later in 2019, and could even take longer than this.

Nonetheless, the investigations teams are at a critical stage in this process, which will likely form the basis on which future regulatory proceedings are based.

How does this fit into current debate around audit?

This news comes while the FRC itself is being investigated. Back in December 2018, John Kingman released a report suggesting that the FRC is not up to the standards a regulator should be.

The report said: “The FRC has not, to date, been a particularly effective champion of the need for annual reports and accounts to be comprehensible and of genuine value for their readers.

“The regulator should be required to promote brevity and comprehensibility in accounts and annual reports, to engage meaningfully with investors and asset owners about their information needs, and to ensure the proportionality and value of reports.”

What about the investigation into KPMG’s handling of the Carillion audits?

Gavin Pearson, partner and head of forensic accounting at business advisory firm Quantuma, said: “Given the recent suspension of the KPMG audit partner responsible for the Carillion audits, it is perhaps unsurprising to hear that the FRC’s investigations into the collapse are continuing.

“It is also unsurprising that the FRC has been focusing much of its efforts on the appropriate reporting of contracts, given the significant element of judgment that tends to be involved in valuing turnover and profits on contracts.

“It is, similarly, not at all surprising that the valuation of goodwill is a key area of concern, given this is highly reliant on judgment. Seeing as the business ultimately failed, it is also to be expected that issues surrounding the going concern status are being reviewed.

“There remains significant areas of judgment within the accounts of most companies, but particularly large companies with large value contracts and complex structures of assets and liabilities.

“It is therefore essential that those heavily judgmental areas, such as contracts, goodwill and going concern, are subject to rigorous audit testing to ensure that the accounts present a true and fair view.”