The U.K. Financial Reporting Council opened a probe into KPMG LLP’s audits of Carillion Plc, after the builder collapsed under a mountain of debt earlier this month.
The FRC will examine KPMG’s work from 2014 and whether the auditor breached any “ethical and technical standards,” the accounting regulator said in a statement Monday. The FRC will also look at how KPMG recognized revenue on significant contracts and its accounting for pensions.
Carillion, a U.K. construction company with government contracts in everything from hospitals to the HS2 high-speed rail project, collapsed in January after failing to shore-up finances and get a government bailout, leaving behind debts of 1.6 billion pounds ($2.3 billion). Its fall had been gathering pace since July after a series of construction contracts soured. The failure has prompted a debate in Britain about both how companies are run and the extent to which the government relies on businesses to provide services.
“Several areas of KPMG’s work will be examined including the audit of the company’s use and disclosure of the going concern basis of accounting,” the FRC said. We will “conduct the investigation as quickly and thoroughly as possible.”
The FRC said its probe followed inquiries made since the July 2017 profit warning and would examine audits of financial statements for the years 2014, 2015 and 2016, and additional audit work carried out during 2017.
KPMG said it would cooperate with the FRC probe and believes it “conducted our role as Carillion’s auditor appropriately and responsibly.”
“Transparency and accountability are vital in building public trust in audit,” KPMG said in an emailed statement. “We believe it is important that regulators acting in the public interest review the audit work related to high profile cases such as Carillion.”
The FRC said it will liaise with the official receiver, the Financial Conduct Authority, the Insolvency Service and the Pensions Regulator to ensure there is a joined-up approach to the investigations of Carillion.
Spun off from building-materials giant Tarmac in 1999, Carillion expanded over the past decade through a frenzied acquisition spree, branching out into more services along the way. As successive governments embraced outsourcing to cut spending, it became a leading provider of public services. This exposed it to riskier contracts with narrow margins and large debt financing requirements without ever fully insulating it from the cyclical construction industry.
“It is vital that we are able to have confidence in audit and financial statements,” Michael Izza, chief executive of the Institute of Chartered Accountants in England and Wales, said in a statement after the FRC announcement. “If there are lessons that need to be learned, whether by auditors, the accountancy profession, or management, we must identify them and act.”