The firm overlooked numerous signs that multinational construction company Carillion was loss-making in the three years prior to its collapse, the FRC says.
KPMG UK hit with record £30m for audit failures
KPMG has been given a record fine of more than £30 million ($58 million) by the UK regulator for audit failures in connection with a large construction company that collapsed five years ago with the loss of thousands of jobs.
The Financial Reporting Council (FRC) imposed the penalty on the firm – which was reduced by 30 per cent for co-operation by the company – for “seriously deficient” audits over three years prior to Carillion, a UK-based multinational construction company, entering liquidation in early 2018.
The FRC said it found “significant and serious breaches” in all the audits it investigated which meant “a large public company was not subject to rigorous, comprehensive, and reliable audits in the three years leading up to its demise”.
“KPMG and [former audit partner Peter] Mr Meehan failed to respond to numerous indicators that Carillion’s core operations were loss-making and that it was reliant on short-term and unsustainable measures to support its cash flows,” the FRC said.
“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.”
“KPMG 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.”
KPMG UK chief executive Jon Holt described the regulator's findings as “damning” and apologised.
“It is clear to me that our audit work on Carillion was very bad over an extended period,” he told Sky News. “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.”
The CEO of the FRC, Richard Moriarty, said the collapse of Carillion was a textbook case study in failure.
“Important safeguards that should have been present were seriously lacking,” he said.
FRC executive counsel Elizabeth Barrett said the audit deficiencies were exceptional for their scope and seriousness.
“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,” she said.
Last year, KPMG was fined £14.4 million for misleading the FRC during spot-checks of its audits on two other companies and it will also pay the cost of the investigations into Carillion amounting to more than £5.3 million.
In 2021, KPMG Australia was fined $US450,000 by the US Public Company Accounting Oversight Board over the exam cheating scandal which implicated hundreds at the firm and led to CA ANZ reviewing its conduct procedures.
Nine resolutions are currently before CA ANZ members to revise the conduct code with voting open until the AGM ends on 20 October.