Independent regulator the Financial Reporting Council (FRC) has launched an investigation into KPMG’s audits of collapsed construction giant Carillion.
Following inquiries made since Carillion’s profit warning in July the regulator said a probe will be opened under the Audit Enforcement Procedure.
Audits covering the years 2014, 2015 and 2016 and also any additional work that was carried out in 2017 will be assessed by the accountancy watchdog.
The investigation will be conducted by the FRC’s enforcement division, and will consider 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 Carillion’s use and disclosure of the going concern basis of accounting, estimates and recognition of revenue on significant contracts, and accounting for pensions.
In a statement, the watchdog said: “The FRC is progressing with urgent inquiries into the conduct of professional accountants within Carillion in connection with the preparation of the financial statements and other financial reporting obligations under the Accountancy Scheme.
“The FRC is liaising closely with the Official Receiver, the Financial Conduct Authority, the Insolvency Service and The Pensions Regulator to ensure that there is a joined-up approach to the investigation of all matters arising from the collapse of Carillion. “
The news comes days after it was announced Carillion bosses would be grilled by a committee of MPs.
The Work and Pensions and Business, Energy and Industrial Strategy (BEIS) committees launched a joint inquiry last week, investigating how a company that was signed off by KPMG as a going concern in spring 2017 could go into liquidation with a reported £5bn of liabilities and just £29m left in cash less than a year later.
Commenting on this morning’s announcement, a KPMG spokesperson said: “We note the announcement of the FRC’s investigation into our audits of the financial statements of Carillion plc for the years ended 31 December 2014, 2015 and 2016, and additional audit work carried out during 2017. As we have already commented, we believe that we conducted our role as Carillion’s auditor appropriately and responsibly.
“Transparency and accountability are vital in building public trust in audit. We believe it is important that regulators acting in the public interest review the audit work related to high profile cases such as Carillion. We will cooperate fully with the FRC’s investigation.”
In light of the launch of the investigation, the FRC has also published a reminder to the boards of companies in the construction sector about their responsibilities in corporate reporting.
According to the FRC, construction sector bosses need to pay particular attention to some accounting issues such risk and viability reporting and going concern – the assumption that financial statements are prepared and that the business will continue to operate in the foreseeable future.
On the issue of judgements and estimates, the FRC state revenue recognition is important and must be based on reliable estimates of contract outcomes.
