U.K. Watchdog Scrutinizes Auditing, Accounting at Carillion

The Financial Accounting Resource Center™ is a comprehensive research service that provides the full text of standards, the latest news from the Accounting Policy & Practice Report ®,...

By David R. Jones

The U.K. Financial Reporting Council has launched an investigation into KPMG LLP’s auditing of the financial statements issued by failed construction behemoth Carillion Plc.

FRC, which establishes and enforces accounting and auditing standards for the U.K. and the Republic of Ireland, said Jan. 29 that its inquiry would cover the years that ended Dec. 31, 2014, 2015, and 2016, along with additional auditing work that KPMG performed for the company last year.

The council also said that it is conducting “urgent enquiries” into the conduct of professional accountants within Carillion regarding the preparation of the company’s financial statements and other financial-reporting obligations.

KPMG didn’t immediately respond to a Bloomberg Tax phone call seeking comment.

Defends Auditing Work

KPMG has defended its work for Carillion, saying in a Jan. 23 email to Bloomberg Tax that “we believe that we conducted our role as Carillion’s auditor appropriately and responsibly.”

Carillion, the U.K.’s second-largest construction company that manages hundreds of U.K. government contracts, entered into compulsory liquidation on Jan. 15, along with five of its affiliates, to terminate its business operations.

FRC began looking at Carillion’s financial reporting following the company’s July 2017 profit warning, one of three Carillion issued last year.

Scope of Investigation

Carillion’s 2016 annual report included a viability statement saying it reasonably expected to continue operating over the upcoming 12 months as a going concern, meaning it can meet its obligations as they arise, a Bloomberg Tax analysis found.

FRC’s investigation, which will consider whether KPMG violated ethical and technical standards for auditors, will evaluate:

  •  auditing conducted of the company’s use and disclosure of the going concern basis of accounting;
  •  revenue recognition and estimates on significant contracts; and
  •  pensions accounting.
Viability statements—included in annual reports to satisfy the U.K.’s Corporate Governance Code of best practices for listed companies—aren’t audited, KPMG said in its Jan. 23 email. As a result, auditors aren’t required to approve viability statements, the email said.

No Schedule for Completion

FRC hasn’t set a timetable for concluding the inquiry.

The council previously has taken up to several years to wrap up its investigations but plans to conclude inquiries more quickly moving forward, FRC said in its 2018-2021 strategy document.

FRC said it is working closely with U.K. financial services regulator, the Financial Conduct Authority and The Pensions Regulator, a U.K. government body, “to ensure that there is a joined-up approach to the investigation of all matters arising from the collapse of Carillion.”

In addition, two House of Commons panels, the Work and Pensions Committee and the Business, Energy and Industrial Strategy Committee, said Jan. 30 that they are undertaking their own inquiry into how Carillion handled pension contributions.

Potential Sanctions

Once its investigation is finished, FRC will decide whether to bring enforcement proceedings against KPMG or individuals.

If enforcement proceeds, the case would be referred to an independent disciplinary tribunal, which, following a hearing, could impose financial or professional sanctions, or both.

KPMG as a firm—as well as individual KPMG auditors and Carillion accountants and board members who belong to U.K. professional accounting organizations—could face financial penalties if FRC determines that the firm contravened ethical standards.

Individuals who are members of accounting professional groups also might be reprimanded or suspended from practicing in the professional.

To contact the reporter on this story: David R. Jones in London at correspondents@bloomberglaw.com

To contact the editor responsible for this story: S. Ali Sartipzadeh at asartipzadeh@bloombergtax.com

Copyright © 2018 Tax Management Inc. All Rights Reserved.

Request Financial Accounting