Rt Hon Frank Field MP, 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 £21 million 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."
Rachel Reeves MP, Chair of the Business, Energy and Industrial Strategy (BEIS) Committee, said:
"KPMG has serious questions to answer about the collapse of Carillion. 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. For the sake of all those who lost their jobs at Carillion and in the interests of better corporate governance, KPMG should, as a bare minimum, review its processes and explain what went wrong."
The responses reveal that Big Four have billed the company, pension schemes and the Government £71 million since 2008 relating to Carillion:
The past three Chief Financial Officers were ex-Big Four, two of them KPMG:
- Ex-KPMG: Richard Adam (CFO 2007-2016) and Emma Mercer (CFO 2017)
- Ex-E&Y: Zafar Khan (CFO 2017) and Andrew Dougal (Audit Chair since 2011)
A list of major pieces of work by each is below, and PWC is now working as Special Managers of Carillion for the Official Receiver (OR). A letter from the OR, also being published today, indicates that PWC were the only option to appoint as Special Managers to administrate the insolvency because they were the only one of the 'oligopoly' of firms who would not have an immediate conflict of interest. In evidence to the Liaison Committee this week, John Manzoni, the chief executive of the civil service, said that the OR has been granted £150 million of public funds to run the Carillion liquidation, adding that the final cost to the taxpayer could be more or less than that, depending on how much the OR manages to claw back from selling on Carillion's contracts.
KPMG, who will be questioned in Parliament on 22 February, have audited Carillion's accounts every year since the company’s inception in 1999, receiving £29.4 million in fees in the process. They were asked additional, in-depth questions, particularly in regard to their last audit of the 2016 accounts, when the company was famously signed off as a "going-concern" only to announce a £845 million contract write down and profit warning months later, before crashing into liquidation on 15 January 2018.
Key points that emerge from the KPMG response:
- They do not accept any suggestion of blame but assert they conducted their work "appropriately and responsibly"
- 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."
- 14% (97) of all contracts were loss-making at end of 2016.
- It does not appear they pressed the company to disclose further information about adopting the new revenue recognition standard, despite the FRC stating in October 2016 that they expected most companies to have made "substantial progress in their implementation of these standards".
- KPMG reduced their total audit fees from £1.8m to £1.4m between 2008-2016, despite their hourly fees increasing over that period: does that could suggest that they were cutting back on the work they were performing, relying on past assurances they had?
- They provided pensions advisory work in order to improve the employers' covenant for PPF purposes in 2011.
KPMG will likely be pressed on the points about pensions, and the valuation of “goodwill” which represented 73% of the value of Carillion’s assets in 2016, when they appear before the Committees on 22 February 2018, which are not addressed in any depth in their letter.
The FRC's 2017 "audit quality inspection" of KPMG raised the following points on weaknesses in their audit, saying the firm should:
- Improve the extent of challenge of management in relation to areas of judgment, in particular impairment reviews, loan loss provisions and other valuations.
- Re-assess the firm's approach to the audit of revenue and the related training provided.
- Strengthen the firm’s audit approach for corporate entities in relation to defined benefit pension scheme assets and membership data.
- Improve the accuracy or precision of the description of audit procedures performed in auditors' reports.
Grid of Big Four work for Carillion ( PDF 50 KB)