Big Four ‘feasted’ on Carillion with £71m fees
The Big Four have been accused of ‘feasting on what was soon to become a carcass’, after the joint select committee inquiry into the collapse of Carillion found the accountancy firms had billed for £71m of work with the outsourcer since 2008, amid claims the relationships became too ‘cosy’
13 Feb 2018
The work and pensions and business, energy and industrial strategy (BEIS) joint select committee wrote to each of the Big Four asking for details of their engagements with Carillion over the past nine years.
KPMG (£16.8m) and EY (£15.6m) picked up the lion’s share of audit fees, with Deloitte receiving £10.3m and PwC £8.5m. All four firms received government payments of between £1.7m and £6.5m for consultancy work related to Carillion, and PwC also received £6.1m in fees from the company pension scheme.
Frank Field, chair of the work and pensions Committee, said: ’The image of these companies feasting on what was soon to become a carcass will not be lost on decent citizens. We saw at the end of our evidence session that the former directors of Carillion are, unlike their pensioners, suppliers and employees, alright. These figures show that, as ever, the Big Four are alright too. All of them did extensive – and expensive – work for Carillion.
‘PWC managed to play all three sides – the company, pension schemes and the government – to the tune of £21m and are now being paid to preside over the carcass of the company as special managers. It was perhaps telling that, with their three fellow oligarchs conflicted, PWC were appointed to this lucrative position without any competition.’
In a letter to the committee David Chapman, the official receiver, said the tight timescale for Carillion’s liquidation meant it was not possible to undertake a tendering process.
‘In appointing the special managers, I took into account the need for a firm that was not conflicted; which had sufficient resources to undertake this complex liquidation; and that had some existing knowledge of the Carillion group. The appointments were approved by the court,’ Chapman wrote.
KPMG, which has audited Carillion's accounts every year since the company’s inception in 1999, receiving £29.4m in fees, was heavily criticised by MPs. They highlighted the firm signed off Carillion as a going concern in the audit of the 2016 audits, only for the company to announce a £845m contract write down and profit warning months later.
Rachel Reeves, chair of the BEIS committee, said: ‘Either KPMG failed to spot the warning signs, or its judgement was clouded by its cosy relationship with the company and the multi-million pound fees it received.’
In an 18-page submission to counter the committee’s concerns, KPMG chairman and senior partner Bill Michael said ‘the audit work we did was appropriate and responsible.’ He argued that it is ‘not correct that an unmodified audit report gives a company a "clean bill of health"’, and cited an ‘expectation gap’ that exists in relation to the purpose and nature of an audit.
KPMG’s letter outlines its approach to accounting for long-term contracts, and states that of some 700 contracts which were subject to profit or loss movement in the UK in 2016, 97 of those recorded a loss in 2016 (some 14% by number). It discusses the issues identified by the introduction of IFRS 15, the new accounting standard for revenue recognition. In addition it covers the approach to assessing goodwill, which at £1.57bn, was the largest single item on the balance sheet, and represented over 70% of the group's non-current assets.
In its assessment of KPMG’s response, the select committee says: ‘The list of reasons why the contracts deteriorated is lengthy: it is difficult to understand or believe these all occurred within such a short time period. One of the investor responses we received, which will be published separately later this week, wrote of this that "Impairments to receivables on this scale do not typically occur overnight."’
MPs were critical of KPMG’s apparent failure to press Carillion to disclose further information about adopting IFRS 15, despite the FRC stating in October 2016 that they expected most companies to have made ‘substantial progress in their implementation of these standards’.
The committee pointed out that KPMG reduced their total audit fees from £1.8m to £1.4m between 2008-2016, despite their hourly fees increasing over that period, and said there is a question mark over whether the firm was cutting back on the work it was performing and relying on past assurances.
MPs said they will be pressing KPMG on its work regarding Carillion’s pensions, and the valuation of goodwill , when the firm gives evidence in a session scheduled for 22 February 2018, claiming these issues ‘are not addressed in any depth in their letter’.
Details of the Big Four responses on Carillion work are here.
An infographic showing Big Four involvement with Carillion is here.
Report by Pat Sweet