The Big Four accountancy firms have been told to provide MPs on the joint inquiry into the collapse of Carillion with details of all payments received for work for Carillion over the last 10 years, reports Sara White
The chairs of the Work and Pensions, and Business, Energy and Industrial Strategy (BEIS) Committees have written a joint letter to the managing partners of the Big four accounting firms - KPMG, EY, PWC and Deloitte - asking for detailed accounts of any and all services the firms have offered Carillion, its subsidiaries and its pension scheme, over the last 10 years, and what fees they were paid.
The information must be provided to the Committee inquiry by 2 February.
The letters ask each firm to provide details, broken down on an annual basis dating back to 2008, on any terms of engagement that the firm had with Carillion plc, any subsidiaries of Carillion plc and the Carillion Pension Plan. All responses must include overviews of what the contracted services related to and also the fees charged for those services.
As the external auditor, KPMG faces a detailed examination of its audit process, with MPs stating that ‘your 2016 audit opinion noted the risks relating to estimates around revenue recognition from contracts, but concluded that there was no material misstatement in the accounts.
‘Yet three months later, a KPMG-led review of Carillion’s contracts resulted in a £845m provision relating to these contracts. KPMG’s 2016 audit opinion outlines in detail the audit work conducted on these contracts, but concluded no provision was required. What changed?’
MPs also want answers from KPMG on the proportion of Carillion’s contracts which were loss-making, the impact on the reserves from the application of IFRS 15 Revenue from Contracts with Customers, which was expected to cost the company up to £150m when the new standard was adopted from 1 January 2018, and the sustainability of maintaining the level of goodwill on the balance sheet, estimated at £1.57bn and representing over 70% of the group’s non-current assets.
KPMG was the external auditor of Carillion for the last 18 years and has audited the accounts since the company was incorporated in 1999; over this time the firm has earned £29.4m in audit and related fees. The current audit would have been almost complete when Carillion went under, leaving further questions about the audit process and its ability to identify structural problems with the company and its financial instability.
MPs are concerned that ‘the latest set of audited financial accounts were signed off by KPMG with an unmodified opinion in March 2017, only for the company to go bust nine months later. In light of this "dramatic turn of events", the Committees have a series of additional specific questions to KPMG.’
According to the latest annual report and accounts KPMG was paid £1.4m for audit fees and a further £200,000 for non-audit fees for the year ended 31 December 2016, slightly down on 2015 when the non-audit fees were £400,000, with £1.4m in audit fees. The accounts were signed off by the auditors in March 2017.
At the time KPMG stated: ‘Based on the knowledge we acquired during our audit, we have nothing material to add or draw attention to in relation to the directors’ viability statement, concerning the principal risks, their management, and, based on that, the directors’ assessment and expectations of the Group’s continuing in operation over the three years to 2019’.
Deloitte LLP was contracted to provide internal audit services as part of an outsourcing agreement. The firm did not receive as detailed a request for information as KPMG, but MPs are likely to focus on its role as internal auditors, as well as any non-audit related work conducted since 2008. The fee for other assurance services, which includes internal audit, was zero in the current annual report, while in the previous year it was reported as £100,000.
In addition, the Financial Reporting council (FRC) has launched an investigation into the audit of Carillion under its audit enforcement procedure, and will investigate whether the auditor has breached any relevant requirements, in particular the ethical and technical standards for auditors.
Several areas of KPMG’s work will be examined including the audit of the company’s use and disclosure of the going concern basis of accounting, estimates and recognition of revenue on significant contracts, and accounting for pensions.
Committee hearing set
The joint committee will hold its first evidence session on Carillion on Tuesday 30 January at 9.15am. The following witnesses have been called:
- Sarah Albon, chief executive officer, The Insolvency Service
- Stephen Haddrill, chief executive officer, Financial Reporting Council
- Chris Martin, managing director, Independent Trustee Services Ltd
- Robin Ellison, chair of trustees of Carillion Defined Benefit Pension Scheme
Further information on the joint committee Carillion inquiry is available here
Letter from the Chairs to KPMG
Letter from Chairs to Deloitte
Letter from Chairs to EY
Letter from Chairs to PwC
Report by Sara White