FRC publishes final settlement decision to KPMG on Carillion

The Financial Reporting Council (FRC) has imposed historic sanctions against KPMG and two of its former partners for their audit failures related to Carillion plc, once a major player in the UK construction and facilities management industry.

This action follows a protracted investigation into the audits carried out between 2014 and 2016, leading up to Carillion’s insolvency in January 2018.

KPMG was fined a record £30 million, which was later reduced to £21 million to account for the firm’s cooperation with the FRC’s investigation. The sanctions also include severe reprimands and an order for KPMG to reassess and report on its current measures to prevent similar breaches. The firm is also required to cover the Executive Counsel’s costs of both investigations, amounting to over £5 million.

The two former partners implicated, Peter Meehan and Darren Turner, faced significant fines and professional sanctions. Meehan was fined £500,000 (reduced to £350,000 for cooperation), excluded from membership of the Institute of Chartered Accountants in England and Wales (ICAEW) for ten years, and issued a severe reprimand.

Similarly, Turner was fined £100,000 (reduced to £70,000) and also received a severe reprimand.

These penalties reflect a comprehensive evaluation by the FRC, which highlighted numerous breaches of auditing standards. Particularly, the audits failed to challenge Carillion’s management adequately, did not gather sufficient audit evidence, and demonstrated a lack of professional scepticism.

These oversights contributed significantly to the misinformation about Carillion’s financial health, as the company was actually sustaining major losses and relying on unsustainable short-term financial strategies to bolster its cash flow.

These findings underline a critical period of oversight failure that not only questioned the integrity of financial audits but also had wider implications for financial reporting and corporate governance standards within the UK. This situation led to widespread job losses and substantial disruptions in public services, highlighting the need for stricter audit compliance and oversight to prevent such corporate collapses in the future.

For more details on the sanctions and the background of the case, you can visit the FRC’s official statement and the coverage by Fountain Court Chambers.

Understanding the KPMG Carillion Audit Sanctions:

1. Breach of Audit Standards: Investigations revealed that KPMG failed to gather sufficient audit evidence and did not exhibit the necessary professional skepticism required for audits of this scale. These failures contributed significantly to the misleading financial representations of Carillion’s fiscal health, which were far from the reality of its financial distress​ (FRC (Financial Reporting Council))​.
2. Financial Sanctions and Orders: KPMG received a record fine initially set at £30 million, later reduced to £21 million, recognizing the firm’s cooperation during the investigation process. Additionally, KPMG was ordered to reassess its audit practices to prevent similar failures in the future and to cover the Executive Counsel’s investigative costs amounting to over £5 million​ (Brick Court)​​ (Fountain Court Chambers)​.
3. Individual Sanctions: The sanctions extended to individual auditors involved, notably Mr. Meehan and Mr. Turner. Mr. Meehan was fined £500,000, later reduced to £350,000 due to his cooperation, and received a ten-year exclusion from the ICAEW. Mr. Turner was fined £100,000, reduced to £70,000, along with a severe reprimand, reflecting their roles in the audit lapses and their respective levels of cooperation during the investigation​ (FRC (Financial Reporting Council))​.

The Role of the FRC in KPMG’s Carillion Audit Failures

This case underscores a crucial lapse in audit integrity and the essential role of oversight agencies like the FRC in enforcing standards. The FRC’s thorough investigation and the resultant penalties highlight the need for audit firms to maintain independence and rigor, especially when auditing companies of significant economic and social importance like Carillion.

The collapse of Carillion had widespread implications, affecting numerous public services and resulting in substantial job losses, which further underlines the broader consequences of audit failures.

These findings not only question the reliability of past financial audits conducted by KPMG but also serve as a stern reminder to all audit firms of the critical need to adhere to the highest standards of accuracy and ethics in their audit practices.