- KPMG believes it will be investigated by the FRC for its role in the collapse of the giant infrastructure firm Carillion.
- “There is an investigation being conducted and we’ll comply fully with that investigation, at this moment,” Melanie Richards, KMPG UK’s deputy chair told Business Insider at the World Economic Forum in Davos, Switzerland. She was referring to the FRC’s statement that it is “monitoring the situation” and considering further action.*
- Carillion was once valued at more than £2 billion. It went into liquidation with debts of £1.5 billion ($2.1 billion).
DAVOS, Switzerland – Melanie Richards, KPMG’s UK deputy chair, told Business Insider that she believes her company will be investigated by the Financial Reporting Council over its role in the collapse of Carillion, the giant infrastructure contractor that went into bankruptcy on January 15.
KPMG had certified the company’s 2016 annual report, which was filed on March 1, 2017.
The company was forced into liquidation in January 2018, after running up debts of £1.5 billion. At one time it had a market cap of above £2 billion. Up to 43,000 jobs, including 19,000 in the UK, are thought to be at risk, and 30,000 small businesses are thought to be owed money.
Carillion was one of the government’s biggest contractors, building NHS hospitals, schools, and prisons. The collapse is being used by the Labour party to criticise the Conservative government’s use of private companies to carry out public infrastructure works.
Carillion’s main accounting problem was that although it won contracts by making low bids on government construction work, the company offered prices below the cost of servicing the lifetime of the contracts. To offset that, the company continued to bid on further government work, hoping that the new incoming revenue would make up for the shortfall on older, uneconomic contracts.
In the 2016 annual report, KPMG certified that Carillion was on a sound financial footing, and would be so until at least 2019. Its “viability statement” at the time said:
“We have nothing to report on the disclosures of principal risks:”
“Based on the knowledge we acquired during our audit, we have nothing material to add or draw attention to in relation to:”
“− the Directors’ viability statement on page 31, concerning the principal risks, their management, and, based on that, the Directors’ assessment and expectations of the Group’s continuing in operation over the three years to 2019; …”
Carillion’s board relied on KPMG’s certification to insist in the same annual report that the company could survive “extreme downside scenarios” over the coming three years:
“On the basis of both reasonably probable and more extreme downside scenarios, the Directors believe that they have a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the three-year period of their assessment.”
In a conversation at the World Economic Forum meeting in Davos, Switzerland, Richards told Business Insider that KPMG stands by its work. “What we did was we signed their audit which we are standing by. We recognise that the scale of disruption and attention this is getting from the media and indeed the situation that has evolved, means that we are going to be subjected to an inquiry by the FRC and we are absolutely embracing that and it’s the right thing to happen. But just to be very clear we are, we will completely comply with that, but as we stand here today we are standing by the work that we did,” she said.
The FRC said earlier this month it was “monitoring the situation” and “we have the powers to investigate.”
Richards said KPMG also stood by the work the company did for Carillion in 2017, when it was asked to review the company’s existing contracts. KPMG looked at 58 contracts and found four that were troubling, according to the Financial Times.
“We are standing behind the work that we did, including the work we did around the original contracts,” Richards said. “There is an investigation being conducted and we’ll comply fully with that investigation, at this moment.” A spokesperson for KPMG and an official at the FRC both said later that a formal investigation had not yet started.
Companies go bankrupt all the time, of course. And all publicly traded companies have auditors. So it is fairly common for auditors to find themselves answering questions when one of their clients goes to the wall. It is likely that in any inquiry KPMG will argue that it is only able to look at the financial history of a company. It doesn’t have a crystal ball allowing it to see the future. In Carillion’s case, its contracts extended over periods of years or decades, and the company was required to bear the cost of construction delays or make good when flaws were found in buildings. KPMG was not in control of the many variables affecting Carillion’s business, Richards said.
“We take our responsibility to the capital markets and to all the stakeholders incredibly seriously. So I don’t want to diminish the seriousness, we take all that but I would say to you that clearly the Carillion situation … has a number of factors that will contribute to an end result and I don’t have intimate knowledge of the all the factors that have ended up with the result that we are now seeing here,” she said.
*Correction: This story was updated to reflect the fact that the FRC has not yet formally started its probe.