Big Four audit firm KPMG has been fined a record £21,420,000 for ‘exceptional’ and ‘seriously deficient’ audit work related to collapsed outsourcer Carillion as KPMG boss admits findings are 'damning'
Many of the breaches involved failing to adhere to the most basic and fundamental audit concepts such as to act with professional scepticism and to obtain sufficient audit evidence.
This is the largest ever fine imposed by the audit regulator and closes a five-year investigation into a number of audits conducted by KPMG between 2013 and 2017.
KPMG cooperated with investigators and as a result was given a substantial discount on the original fine which was set at £30.6m, twice the size of any fine issued by the Financial Reporting Council (FRC).
The penalties related to two separate investigations, covering audits from 2013 to 2017, prior to Carillion’s collapse in January 2018.
The first fine for four audits from 2014 to 2017 was originally set at £26.5m but was reduced by 30% to £18,550,000 after the firm cooperated with the investigation. KPMG was also given a severe reprimand and has been ordered to take immediate remedial action to prevent any recurrence of such serious audit failures.
Former lead audit partner Peter Meehan was fined £350,000, reduced from £500,000, and has been banned from ICAEW membership for 10 years to run consecutively with his current ban.
A second decision related to the audit of 2013 financial statements, resulting in a fine of £3.5m, reduced to £2.45m, and Darren Turner, a former partner and audit engagement partner, who oversaw the Carillion audit, has been fined £70,000.
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.
'It is clear to me that our audit work on Carillion was very bad, over an extended period. 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 unacceptable standard of the audit work was unparalleled and the scale of the fines is meant to act as a serious deterrent and prevent any repeat of such sub-standard work. Despite the scale of the failings, the FRC said that the poor quality of audit work on the 2013 was not ‘intentional, deliberate or reckless’.
KPMG 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. KPMG earned £1.4m for the 2016 year end audit.
The final decision reports have not yet been published but the summary findings illustrate multiple audit failures. Over a period of four years, KPMG failed to gather sufficient evidence to ensure that the financial statements were true and fair, and did not question whether Carillion’s accounts ‘might have been incorrect or unreliable’. Significant and serious breaches were found in each audit investigated.
The FRC also said that ‘Carillion was a very important client for both KPMG and key members of the audit team during the relevant years. This created a risk to their objectivity. In a number of instances lead partner Meehan and other members of the audit team ‘failed to adopt a rigorous and robust approach, accepting the presentation of financial information that suited Carillion’s management’.
In the 2016 audit, the audit report was signed off six weeks before all the relevant work and checks were completed, undermining the integrity of the audit.
The failures in the 2013 audit related to the way contracts with a new outsourced IT provider were accounted for, which distorted the reported profit, resulting in a significant boost to the balance sheet. KPMG and lead partner Turner failed to question this accounting treatment which meant they did not identify potentially misleading disclosures in the financial statements.
FRC executive counsel Elizabeth Barrett said: ‘The number, range, and seriousness of the deficiencies in the audits of Carillion during the period leading up to its failure was exceptional and undermined that credibility and the public trust in audit. This is reflected in the financial sanction imposed on KPMG LLP, the highest ever imposed by the FRC.
‘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.
‘The breaches in relation to the 2016 audit even include failing to ensure that the audit process itself was properly managed and that the audit file was a reliable record. These requirements lie at the heart of proper auditing.
‘The seriousness of the failings in the 2016 audit is compounded by the breaches of the Ethical Standards relating to the fundamental principles of objectivity, independence, and integrity.
‘The non-financial sanctions imposed on KPMG LLP are focused on ensuring that failures on this scale will never be repeated.’
Over the last five years, KPMG has addressed a number of the audit failings, tightening procedures and improving oversight.
Holt said: ‘Since this audit work was undertaken, we have done an enormous amount to improve controls and oversight across our firm, to ensure that these failings could not take place today. But ultimately it still falls to each of us, individually, to hold ourselves and each other to the highest professional standards every day.
‘As an auditor, I simply cannot defend the work that we did on Carillion. As the chief executive of KPMG, I am determined that we face up to this failure, and I am absolutely committed to continuing to work with my colleagues across the business to ensure that nothing like this can happen again.'
Since the time of these audits, significant improvements and changes have been made to KPMG’s audit processes and procedures. The firm's three-year Audit Quality Transformation Programme delivered a comprehensive programme of training and implemented new technology and controls (including introducing greater support and challenge of auditors by central teams), and performance management as well as standardising KPMG’s audit approach. This includes a second line of defence team to review and oversee complex audits.
The aim of the transformation plan was to ensure that the highest standards of consistency and rigour are applied across all of the firm’s audits. Central to the approach was ensuring that KPMG staff demonstrate an enhanced level of professional scepticism and challenge of company management; greater consistency of decision-making and transparency with increased central monitoring of audits at the planning, delivery and completion stages. Both robust challenge of management and completion and reporting have been called out as examples of good practice by the FRC in the recent round of audit quality inspection reports.
This now closes FRC's Carillion investigations into KPMG. Last May, KPMG was fined £14.4m as a firm and a further £400,000 was slapped on lead audit partner Peter Meehan after an investigation into how the firm created fake minutes of meetings and altered spreadsheets before sending documents to FRC inspectors during the audit quality inspection process. This case involved ‘repeated and deliberate deception of the auditors’ regulator exercising its functions in the wider public interest’, FRC executive counsel Elizabeth Barrett said at the time.
As part of the latest decision, KPMG LLP will also pay FRC’s legal costs of £5,324,365.68 for both investigations.