KPMG is in advanced negotiations with regulatory authorities regarding an unprecedented fine, potentially running into tens of millions of pounds, over its audit failures concerning the ill-fated construction behemoth, Carillion. Sky News reported that discussions between the renowned accountancy firm and the Financial Reporting Council (FRC) are on the brink of conclusion, with a formal announcement looming in the coming weeks.
City insiders have disclosed that both parties have been thrashing out penalty figures ranging between £25 million and £30 million, with potential reductions based on KPMG’s cooperation with the ongoing investigation. Following these anticipated deductions, sources suggest the final fine could hover around £20 million. Nevertheless, it’s worth noting that these numbers remain subject to adjustments, with some voices hinting at the possibility of more substantial penalties.
In a technical sense, the FRC is conducting two separate inquiries into KPMG’s conduct concerning Carillion—a probe spanning the financial year 2013 and another encompassing the subsequent four fiscal years. If this punitive action is formalised, it will effectively mark the conclusion of KPMG’s involvement in one of the most infamous corporate collapses witnessed in recent British history.
Carillion’s catastrophic insolvency in 2018, after months of frantic attempts to salvage the company, sparked a maelstrom of criticism directed at both its directors and advisors. The aftermath served as a potent catalyst for extensive calls for comprehensive reforms within the auditing profession—many of which, however, are yet to be implemented by the government.
It’s pertinent to note that KPMG has already been slapped with a substantial fine related to its role in the Carillion debacle. In July of the preceding year, the firm faced a hefty £14.4 million sanction for misleading the FRC during spot-checks pertaining to its audits of Carillion and Regenersis, an outsourcing firm. This monetary penalty is part of a slew of fines imposed on KPMG, along with its ‘big four’ peers Deloitte, EY, and PricewaterhouseCoopers, over the past half-decade due to a litany of audit lapses.
The specifics and extent of the sanctions that will be levied by the FRC against former KPMG partners linked to the Carillion audit remain shrouded in ambiguity at present. Earlier this year, KPMG and the Official Receiver reached an undisclosed settlement amounting to £1.3 billion on behalf of Carillion’s creditors, who had alleged negligence on the part of the auditing firm.
This corporate disaster’s repercussions have also ensnared several former board members. In July, Zafar Khan, who briefly served as Carillion’s Group Finance Director in the lead-up to its implosion, received an 11-year boardroom ban courtesy of the government’s Insolvency Service—a significant development marking the first such ban imposed under the Company Director Disqualification Act against any former Carillion executive. Nevertheless, legal proceedings against several others, including former CEO Richard Howson, are ongoing.
In total, eight former Carillion directors are currently confronting potential bans, following the initiation of legal proceedings authorised by Kwasi Kwarteng, the then Business Secretary, in January 2021.
It’s worth noting that last year, Mr. Khan, Mr. Howson, and Richard Adam, who also served as Carillion’s Finance Chief, were collectively fined nearly £1 million for disseminating misleading statements to investors regarding the company’s financial health. These individuals have reportedly lodged appeals against the fines imposed by the Financial Conduct Authority.
Carillion, once deeply involved in the construction and maintenance of hospitals, roads, and the provision of school meals, went under while grappling with close to £7 billion in debt. At the time of its collapse, Carillion held approximately 450 construction and service contracts across government and employed over 43,000 individuals, including 18,000 in the UK.
A scathing report from the Commons Business Select Committee dissected the company’s corporate governance, concluding that “Carillion was well-placed to win contracts as a large company and competitive bidder. Its failings in subsequently managing them to generate profit was masked for a long time by a continuing stream of new work and… accounting practices that precluded an accurate assessment of the state of contracts.”
KPMG served as Carillion’s auditor for nearly two decades, pocketing a cumulative £29 million in fees for its auditing services.
Lastly, in recent news, the government is reportedly poised to exclude audit reform legislation from the forthcoming King’s Speech in November. As part of previously ratified plans, the FRC is set to be replaced by a statutory regulatory entity known as the Audit, Reporting, and Governance Authority (ARGA).