The Financial Reporting Council (FRC) has imposed a historic fine of £21 million on KPMG for its audits of Carillion, the government contractor that collapsed in 2018.
The FRC today (October 12) announced that the firm was initially fined £30 million, but the penalty was subsequently decreased by 30% due to its cooperation throughout the five-year investigation.
The FRC highlighted that Carillion, employing approximately 12,000 staff, held significant importance as a client for KPMG. The audit team at KPMG, including key members, faced a “risk to their objectivity” due to its association with Carillion.
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.”
The legal action, focusing on audits of Carillion’s accounts from 2014 to 2016, was initiated by Britain’s official receiver with the aim of recovering losses for Carillion’s creditors.
The statement by the accounting watchdog highlighted Peter Meehan, a former partner at KPMG who no longer works for the company. The FRC specified that Meehan who led the audit and his team had, at times, approved audit reports before completing all the necessary work.
Meehan received a financial sanction of £500,000 which was reduced by 30% to £350,000 to reflect his co-operation and admissions throughout the investigation. Additionally, Darren Turner, another former partner at KPMG, was fined £100,000 for his part in the audit.
KPMG’s Holt stated that the audit work conducted by the firm was “very bad” and former partners at the firm failed to perform their duties adequately.
“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.”
KPMG and Holt say they are unable to defend the work that they completed on Carillion and have implemented various improvements to prevent these failings occurring again.
Audit Reform bill required
Elizabeth Barrett, executive counsel at the FRC said: “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.”
Government ministers had committed to overhauling the audit and corporate governance systems in response to the Carillion scandal and several other high-profile collapses. However, in September 2023, news broke that government officials would likely postpone the scheduled restructuring of the UK’s audit and governance regime.
The latest fines issued to KPMG highlight the need for the government to publish the Audit Reform Bill, which was promised over a year ago, according to Anne Kiem OBE, chief executive of the Chartered Institute of Internal Auditors.
“This legislation is urgently needed to put the audit regulator on a statutory footing with the legal powers it needs to do its job effectively.”