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The Financial Reporting Council (FRC) has levied a landmark £21 million fine against KPMG for its audit of Carillion, the government contractor that went under in 2018.
In a statement issued on Thursday, the FRC indicated that while the initial penalty was £30 million, it was subsequently reduced by 30% owing to KPMG’s cooperation during the five-year investigation.
The FRC underscored Carillion’s substantial importance as a client for KPMG, noting that KPMG’s audit team, including key members, faced potential “objectivity risks” due to their association with Carillion.
Jon Holt, CEO and senior partner of KPMG in the UK, expressed, “These findings are severe. We have fully cooperated with the investigation, and we accept its conclusions and the sanctions imposed without reservation. I deeply regret that these shortcomings occurred within our firm.”
The legal action, centering on audits of Carillion’s accounts spanning 2014 to 2016, was instigated by Britain’s official receiver with the aim of recouping losses for Carillion’s creditors.
The FRC’s statement called attention to Peter Meehan, a former partner at KPMG who is no longer with the company. The FRC specified that Meehan, who led the audit, and his team, on occasions, greenlit audit reports before completing all necessary work.
Meehan was subjected to a financial penalty of £500,000, later reduced by 30% to £350,000, acknowledging his cooperation and admissions during the investigation. Additionally, another former KPMG partner, Darren Turner, received a £100,000 fine for his role in the audit.
KPMG’s Holt acknowledged that the firm’s audit work had been “very poor,” and former partners at the company failed to fulfill their duties adequately.
“Junior colleagues were seriously let down by those who should have set a clear example, and I am both saddened and infuriated that this transpired at our firm.”
KPMG and Holt conveyed their inability to defend the work performed on Carillion and have since implemented various enhancements to prevent a recurrence of such failures.
Elizabeth Barrett, executive counsel at the FRC, commented, “Many of the breaches involved the failure to adhere to fundamental audit principles, such as maintaining professional skepticism and acquiring sufficient appropriate audit evidence.”
In response to the Carillion scandal and other high-profile collapses, government ministers had pledged to overhaul the audit and corporate governance systems. However, news emerged in September 2023 that government officials might delay the scheduled revamp of the UK’s audit and governance framework.
The recent fines imposed on KPMG underscore the urgency for the government to publish the Audit Reform Bill, which was promised over a year ago, as stated by Anne Kiem OBE, CEO of the Chartered Institute of Internal Auditors.
“This legislation is urgently needed to establish the audit regulator on a statutory basis, equipped with the requisite legal powers to effectively execute its duties.”
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