Carillion scandal: Break up “cosy club” of Big Four accountants, MPs say

The failure of Carillion’s accountants to alert investors, workers and other stakeholders of its weakening financial position has led to call for a radical strengthening of corporate oversight, and the break-up of the "oligopoly" of accountancy firms.

Rachel Reeves MP said the company’s auditors should be "in the dock for this catastrophic crash" for "failing to insist the company paint a true picture of its crippling financial problems".

She added that this failure provided "further evidence that the big four are prioritising their own profits ahead of good governance at the companies they are supposed to be putting under the microscope".

Frank Field MP, who co-chaired with Reeves the MPs’ inquiry into Carillion, said Carillion’s failure was a "disgraceful example of how much of our capitalism is allowed to operate, waved through by a cosy club of auditors, conflicted at every turn".

Their final report released today found that KPMG had been "complicit" in signing off Carillion’s "increasingly fantastical figures" and internal auditor Deloitte had failed to identify "terminal failings" in risk management and financial controls, or "too readily ignored them".

Reeves said the big four, who took £72m in fees in the decade leading up to Carillion’s failure, enjoyed a "parasitical" relationship with companies whose books they were meant to scrutinise.

The report recommends that the government should refer the statutory audit market to the Competition and Markets Authority to consider whether the big four accountancy firms should be broken up to increase competition.

The report criticised the failure of KPMG in particular to sound the alarm over the company’s growing debts, and its efforts to disguise its true position.

In the statement that accompanied the publication of the report, KMPG was said to be "complicit" in the company’s "questionable" accounting practices, "complacently signing off its directors’ increasingly fantastical figures" while accepting £29m in fees.

The report itself points out that it was KPMG’s job to check whether directors’ financial statements were accurate. However, at no point in its 19-year tenure as Carillion’s auditor did it raise the alarm.

The MPs found that the company’s management – guided by finance director Richard Adam – used a variety of "accounting tricks" to hide the steady erosion of its working capital between 2012 and July 2017, when it issued a shock profit warning.

The company’s visible debts rose from £242m in 2009 to £961m in June 2017, and its pension deficit increased from £249m in December 2010 to £805m in December 2016.

Michelle Hinchliffe, KPMG’s head of audit (pictured), told the committee that she did not believe her company’s 19-year relationship with Carillion affected its impartiality, and that "independence is a mindset. For myself and all my fellow partners, independence and integrity are absolutely critical to our profession".

A KPMG spokesperson said: "We believe we conducted our audit appropriately. However, it’s only right that following a corporate collapse of such size and significance, the necessary investigations are performed. Auditing large and complex businesses involves many judgments and we will continue to cooperate with the FRC’s ongoing investigation.

"We welcome any future review of our profession. If we consider how the profession has changed in the last decade it is clear there is a need for us to look closely at our business models."

Deloitte said it was "disappointed with the conclusions of the committees in regard to our role as internal auditors" adding that it would take on board any lessons that could be learned from Carillion’s collapse.

One consultant that did give the board unpalatable information was investment bank Morgan Stanley.

It told Carillion in July 2017 that it would not underwrite a proposal to raise further equity, because "Carillion’s senior management could neither produce nor deliver an investment proposition that would convince shareholders and new investors to support the potential rights issue".

Carillion took a dim view of this. After Morgan Stanley’s representatives left the board meeting, Carillion concluded the broker’s position was "not credible" and that while it would be necessary to "continue to work with them as brokers in the short term that would clearly change in the future".

Morgan Stanley confirmed that HSBC were appointed as joint corporate broker on 14 July and that thereafter "Carillion sought our advice less frequently".

Image: "Integrity is absolutely critical": Michelle Hinchliffe, partner and head of audit at KPMG (Vimeo)

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