Carillion collapses into

Liquidation
Much has been made of various Carillion group companies having entered compulsory
liquidation (also known as Winding Up by the Court) in the early hours of the morning of
Monday 15th January 2018.

The Official Receiver (part of the government agency, The Insolvency Service) has automatically
taken up the office of Liquidator by virtue of the court order. One suspects the petition for
compulsory winding up (made by the directors of the company) may make interesting reading.

In a simultaneous application for the companies to be placed into compulsory liquidation, an

application was made (and granted) for the appointment of Special Managers.

The Special Managers are all licenced insolvency practitioners in the case of the six Carillion
companies and are all with the accounting firm, PWC.

What is a Special Manager?

If a liquidator does not have the relevant, but necessary, skills they may make an application to
court pursuant to section 177 of the Insolvency Act 1986, as amended, to appoint a person or
persons as a Special Manager. The Special Manager will then have the necessary skills to
perform whatever tasks are required for the purposes of the liquidation.

A Special Manager can trade a company on a day-to-day basis or plug a specific skills gap of the
Liquidator.

Who can be a Special Manager?

Anyone who has the relevant skills, qualification or experience can be appointed a Special
Manager – even a director of the company in liquidation.
Who can apply to court to appoint a Special Manager?

It is a full application made to court by the Liquidator or a Provisional Liquidator.

What has to be shown?

The application has to be accompanied by a report to court stating the reasons why Special
Managers are required. A Special Manager, if appointed, is an Officer of the Court.

The Liquidator or Provisional Liquidator also has to estimate the value of the business or
property that the Special Manager will be appointed over.

The Special Managers will also have to give security equivalent to the estimated value of the
business or property over which they are appointed.

The powers, duties and obligations of the Special Manager will be laid out in the Court Order
that appoints them. Their prime duty is fiduciary in nature and they remain as an officer of the
court. They will be reporting to the Liquidator regularly and providing accounts every three
months.

How much will a Special Manager be paid?

The court will fix the remuneration basis and quantum of the Special Manager from time to
time. It will be in the application, but is based upon the value of the business or property for
which they are responsible. They will be entitled to be paid as an expense of the liquidation.

How does the appointment of the Special Manager get Terminated?

In the case where a company is already in liquidation, if the Liquidator holds the opinion that
the Special Manager is no longer necessary or beneficial for the company. They make an
application to court for the termination and the court may grant the appointment be
terminated.
If the creditors of the company in liquidation decide (via a decision procedure) that a Special
Manager is no longer necessary or beneficial for the company, then the Liquidator MUST make
the same application to court.

What does this mean for Carillion?

At present (as at 16.30 hours on 15/01/2018), the Special Managers are advising that trade is
currently continuing:

 Employees are to go to work as normal. They will be paid as an expense of the

liquidation.
 Customers must pay outstanding balances under usual trading terms and that services
are continuing as usual (for now)

 Suppliers are to continue providing goods and services under usual contract terms, and
payment will be made for those supplied from the date of the Official Receiver’s
appointment as Liquidator onwards

 Landlords premises are being occupied for the time being until such time as the Special
Manager / Liquidator determines the property requirements. Daily rent will accrue from
the date of liquidation and be paid as an expense of the liquidation until the resource
requirements have been determined. Rent arrears as at 15/01/2018 will be a claim in
the liquidation estate(s)

 Defined Benefit Pension schemes will move to the Pension Protection Fund (a
government agency), so the existing c27,000 members will liaise with them in future.

In very simplistic terms, the winding up order creates a line in the sand:
It is estimated that the Special Managers will be working alongside the senior management,
secured lenders, suppliers and customers until buyers for the various aspects of the business
are found. Indeed, the Special Managers own website is inviting interested parties to get in
touch. There’s even a web form to capture data quickly.

Why Liquidation?

Liquidation is a terminal process for a company.  There is usually one exit route – the company’s
ultimate dissolution.  So why, when it has been widely reported in the press, when the re-
negotiation of credit terms with key financiers began to show signs of failing and that
administration was looming on the horizon, did the administration process not get used?

It is a question that has been puzzling some in the insolvency profession.  But as with every
project, the deeper you dig, the more you find.

Administration Objectives

An administrator has to be able to achieve one of the following three statutory objectives:

 rescuing the company as a going concern

 achieving a better result for the company’s creditors as a whole than would be likely if
the company were wound up without first being in administration

 realising property in order to make a distribution to one or more secured or preferential

creditors
It is purely conjecture, but it may transpire that when you look behind the scenes, behind the
dressing on the windows, no one could honestly say that one of those above objectives could
be achieved.

Secured lenders have the power to appoint Administrators in order to protect their lending,
however, there has to be something of value or worth to sell.  

 Detailed analysis of contracts may find that there is nothing positive left to be achieved
within the contractual terms
 Penalty clauses within contracts can easily become prohibitive

 Warranties and guarantees may prove costly to honour

 Pension scheme legacy issues lead to significant funding questions

 Unions desperate to protect their members’ interests.

Benefits of Compulsory Liquidation

Compulsory Liquidation has some distinct advantages:

 Employee contracts are terminated automatically

 Transfers of Shares are void

 Dispositions of property are void

 Executions or sequestrations are void

 No legal action can be taken against the company without the court’s permission

 All current legal actions are stayed

 All floating charges are crystallised

 Director’s powers cease.

Chasing Turnover

The age-old adage of “Cash is King” once again holds true.

Rumours of Carillion taking longer and longer to pay its suppliers have been flying around as
early as 2013. Recent press articles have implied that contracts were being pursued for
turnover only, without in-depth analysis of the true margins associated with each contract.  The
narrow margins were then squeezed further onto sub-contractors who in turn pushed the costs
down the supply line to the many-a-level of sub-sub-…-sub-contractor.

It won’t be just the main sub-contractors affected by Carillion’s collapse, but the very many
levels of sub-contractors and suppliers.  Some suppliers may not even know that they have
ultimately supplied their goods to a Carillion project.  It will only be when they are not paid that
the true impact will be felt.

It is almost guaranteed that the contracts that the Carillion companies have found themselves
to be bound by are going to be highly complex.  It is unlikely (but not impossible) that such
contracts will survive liquidation proceedings and the termination and penalty clauses are likely
to make eyes water. But Liquidation proceedings do provide for an exit from the contracts.  It
must also be noted that it is likely that previous warranties may not be capable of being
honoured.

Once the profitable contracts have been identified, and sold, what will remain?  Once the level
of creditors is finally known, and the full extent of losses to suppliers identified, only then will
the position become clear.  It is widely anticipated that Carillion’s ripples are going to be felt far
and wide and for a long time.

There is one thing that can be said with any degree of certainty – there is far more to the
Carillion story than is published right now.  As time unfolds the pages will fill up with the stories
from the front lines, probably fully explaining what currently feels like very unusual decisions
having being made.

Are you impacted by Carillion liquidation?

It is widely anticipated that Carillion’s ripples are going to be felt far and wide and for a long
time.

It won’t be just the main sub-contractors, but the very many levels of sub-contractors and
suppliers. Some suppliers may not even know that they have ultimately supplied their goods to
a Carillion project. It will only be when they are not paid that the true impact will be felt.
Any organisation that is currently owed monies by one of the companies in liquidation needs to
start planning NOW. Produce a cash flow forecast and make the very big assumption that those
monies will not be re-paid at all. Look at a detailed quarter (i.e. a 13-week period) on a weekly
basis and see where your funding requirements are going to fall.

If your cash flow is starting to indicate that your business is going to be facing a finance issue,
then early advice is key to business survival. Defensive measures taken now and taken quickly
can often result in long term survival of the business. But you need to plan what is going to
happen with:

 Reduced cash flow

 Reduced turnover

 Loss of a [key?] customer

If you are a customer of a Carillion project, who may have just lost a building warranty (for
example), then you need to consider how any remedial works are going to be paid for and
research what the ultimate future consequences are if you then try to sell the building. Long
term planning needs to be considered now.

If you need assistance in producing a detailed cash flow forecast, please contact Mitchell
Charlesworth. We have a pool of talented individuals that can help you with your cash flows,
assist with sourcing of short and long term finance and provide advice as to your own
organisation’s solvency (or otherwise). The insolvency practitioners of Mitchell Charlesworth
are available for advice and guidance on how to navigate these tricky waters. Please contact a
member of the team below.
https://www.mitchellcharlesworth.co.uk/news/carillion-collapses-into-liquidation/
KPMG’s Carillion negligence
lawsuit reveals ‘rotten system’
May 15, 2020

Reports that accountancy firm KPMG is facing a £250m negligence lawsuit over

its role in Carillion’s collapse highlights the need for Government to address the

UK’s ‘rotten system of bandit capitalism’, urges Unite 

According to reports, the official receiver is preparing a lawsuit against KPMG for
declaring Carillion ‘profitable and sustainable’ in 2016.

The Financial Times reported that legal documents accuse the contractor’s board of

paying out £250m in dividends and advisory fees because they believed the business
was “profitable and sustainable” as a result of KPMG’s audit. Lawyers claim KPMG may
be liable for the pay-outs of these claims.

Unite assistant general secretary Gail Cartmail, said: “It is for the courts to decide if there
are any legal implications for KPMG over its role in the Carillion meltdown in 2018.

“It is obvious, however, that something was clearly very wrong with KPMG’s audit of
Carillion. The firm’s collapse was caused by runaway greed and mismanagement at the
highest levels and the UK’s auditing and accounting system was powerless to stop it.

“The result was hospitals laying half built, thousands of jobs lost and a bill of a least
£150m to the taxpayer. The case of Carillion, and other high-profile corporate failures
where financial blackholes appeared in supposedly healthy firms, exposed the UK’s
rotten system of bandit capitalism for what it is.
“Unfortunately, the government has done nothing to address it. Without the meaningful
reform of company law to prevent similar collapses and the establishment of regulators
with the power to curb grossly avaricious corporate behaviour, it is just a matter of time
before we see another Carillion.”

The Financial Reporting Council (FRC) is currently investigating KPMG for its audit of

Carillion’s statements for the financial years ending 2014, 2015 and 2016.

https://www.pbctoday.co.uk/news/planning-construction-news/negligence-lawsuit-kpmg/76262/
KPMG faces $306M negligence claim over
Carillion audit
U.K. government liquidators are preparing to sue KPMG for £250 million (U.S. $306
million) over alleged negligence in its audits of Carillion, the outsourcing group that
collapsed in 2018 with debts of more than £1.3 billion (U.S. $1.6 billion).

The Financial Times reports the official receiver, which collects assets for creditors, claims the
contractor’s board paid out £234.2 million (U.S. $286 million) in dividends, plus £17 million
(U.S. $20.8 million) in advisory fees, because they believed the business was “profitable and
sustainable” as a result of the audit, but “which would not have been paid if the misstatements in
the financial statements had been detected by KPMG.”

The claims surrounding the dividend payouts are particularly damning given that in the five
years from 2012 to 2016, the company paid out £63 million (U.S. $77 million) more in dividends
than it generated in cash from its operations.

The proposed claim will allege KPMG failed to detect misstatements in the accounting of
revenue and liabilities of its construction contracts and it was negligent in its accounting for
goodwill, which is the future value of companies it had purchased.

In 2017, reviews of Carillion’s contracts resulted in a writedown of three projects by £845

million (U.S. $1 billion), as well as an impairment of goodwill totaling £134 million (U.S. $164
million) in relation to its construction business.

Lawyers for the official receiver said: “KPMG’s breaches of contract and duty caused [Carillion]
to incur losses which it would not have done if it had been aware of its true financial position.”

If the claim goes ahead, it is expected to be the first time liquidators working for the U.K.
government have attempted to sue one of the Big Four firms to recoup losses from a major
insolvency.

Carillion, which employed about 19,000 people in the United Kingdom and had major
government contracts (including for the construction of the HS2 rail line), issued a profit
warning four months after KPMG signed off on its accounts in 2017. It collapsed in January
2018—just five months later—having a pension deficit of about £800 million (U.S. $978
million), owing more than £1.3 billion (U.S. $1.6 billion) to its banks, but holding just £29
million (U.S. $35.5 million) in cash.
The legal claim is another blow for KPMG, whose audit work for the company between 2013
and 2017 is under investigation by the U.K.’s corporate governance regulator, the Financial
Reporting Council, which is expected to publish its initial findings this summer.

In its Carillion inquiry report released in May 2018, Members of Parliament accused KPMG of

being “complicit” in the company’s failure by “failing to exercise and voice professional
scepticism.”

KPMG declined to comment for this article. The firm has previously said it conducted its role as
Carillion’s auditor “appropriately and responsibly.”

https://www.complianceweek.com/accounting-and-auditing/kpmg-faces-306m-negligence-claim-over-
carillion-audit/28903.article
Carillion tribunal: Former KPMG staff turn
on each other
Ex-partner blames junior colleagues for misleading regulators as
tribunal investigates alleged misconduct

The former KPMG partner in charge of auditing Carillion’s accounts before its collapse
has blamed his more junior colleagues for misleading regulators, as former team
members turned on each other during a tribunal hearing allegations against the firm
and six individual auditors.

KPMG, one of the “Big Four” accountants that dominate the sector worldwide, on
Monday admitted misconduct and apologised. However, a tribunal run by the
accounting regulator, the Financial Reporting Council (FRC), must also decide if any of
the six individuals are guilty of misconduct. Five have denied all misconduct.

Carillion collapsed in January 2018, resulting in 3,000 job losses and causing
chaos across hundreds of its projects – including building and maintaining primary
schools, roads, and even Liverpool Football Club’s stadium, Anfield. The FRC alleges
that KPMG misled its inspectors by forging documents in relation to the audit of
Carillion and a software company, Regenersis.

The 2016 Carillion audit was led by Peter Meehan, a partner at KPMG from 1998 until
he was suspended in 2019 following an internal investigation. Meehan’s counsel, Ian
Croxford QC, argued that there was no evidence that he was involved in a conspiracy to
mislead the regulators, and that it was former colleagues who were responsible.

“Mr Meehan placed his trust and confidence in those who were members of his audit
team,” Croxford told the video tribunal on Tuesday. “He feels let down.”

“He was the patsy, and he bitterly regrets that that is the case,” Croxford added, using
the term for a person who is easily duped.

Alistair Wright, a KPMG group senior manager working under Meehan, has already
admitted “serious misconduct”. His counsel, David Turner QC, told the tribunal that
Wright expressed “deep contrition” over misleading documents given to regulators and
undermining public confidence in audits.

However, Turner questioned the portrayal of Meehan as metaphorically “unseeing and

anosmic” – meaning unable to smell – with regards to problems with the Carillion audit.

None of the parties have disputed that the documents under question, including
meeting minutes and a spreadsheet, were created and given to FRC inspectors.
The FRC alleges the documents were designed to give a flattering picture of the work
carried out by KPMG.

The FRC alleged that Richard Kitchen, who was an audit manager of Carillion, edited a
key formula in the spreadsheet to increase a threshold for scrutiny of contracts from
£300,000 to £1.5m. The change ruled out a large number of contracts that would have
been flagged, and avoided uncomfortable questions on why more contracts had not been
scrutinised, the FRC alleged.

“The final version of the [spreadsheet] would have selected a far greater number of
contracts for testing during the course of the audit,” said the FRC’s counsel, Nick
Medcroft QC. “And so the increase of the threshold was a very useful mechanism to cut
out a lot of these contracts.”

Kitchen strongly denies all wrongdoing. His counsel, Fionn Pilbrow QC, argued that
Kitchen was following Meehan’s directions, and that he did not knowingly make false
representations to the regulators.

The FRC made similar allegations relating to minutes that were missing from KPMG’s
audit file, saying auditors had a motive to disguise the fact that documents had not been
created during the audit. Missing documents would have been “great cause for concern
about the quality of KPMG audit work”, the FRC alleged.

KPMG, which is facing a £1bn claim in damages for alleged audit failures, argued that
the tribunal can make no judgments on the quality of the Carillion audit, and that the
problems highlighted were limited to the individual auditors. “There was no systemic
problem, and none is alleged,” said Simon Brocklebank QC, KPMG’s counsel.

The hearing is expected to continue over weeks of evidence. Two more former KPMG
auditors deny misconduct. Stuart Smith, who was the partner in charge of the
Regenersis audit, has reached a confidential settlement with the FRC. The FRC’s counsel
has previously said he denied misconduct.

https://www.theguardian.com/business/2022/jan/11/carillion-hearing-former-kpmg-staff-turn-on-each-
other
KPMG faces complaint of
providing 'false' information
on Carillion audit
LONDON, Sept 1 (Reuters) - KPMG allegedly provided "false and
misleading" information about its audits of collapsed builder Carillion
and data erasure company Regenersis for regulatory checks, Britain's
accounting watchdog said on Wednesday.

The information was provided in connection with the Financial

Reporting Council's (FRC) routine annual quality checks of audits by
the main accounting firms.

"The formal complaint alleges misconduct against KPMG and several

individuals regarding the provision of allegedly false and misleading
information and/or documents to the FRC by KPMG in connection with
the FRC's inspections of two audits carried out by KPMG," the
watchdog said in a statement.

The complaint is against KPMG itself, a former partner, and certain

current and former employees, the FRC said.

"The formal complaint does not allege misconduct arising from the
performance of the relevant audits, nor does it allege that in either
case the financial statements had not been properly prepared," it
added.

KPMG said it took the matter extremely seriously.

"We discovered the alleged issues in 2018 and 2019, and on both
occasions immediately reported them to the FRC and suspended the
small number of people involved," KPMG said.
A disciplinary tribunal will hear the formal complaint and determine
whether there has been misconduct. The hearing will start in January
2022.

"The allegations in the formal complaint would, if proven, represent

very serious breaches of our processes and values. We have
cooperated fully with our regulator throughout their investigation,"
KPMG added.

Separately, the FRC is investigating KPMG's audit of Carillion, whose

collapse triggered a string of government-backed reviews to improve
standards in a market dominated by KPMG, EY, Deloitte and PwC,
known collectively as the Big Four.

In its latest annual report on routine quality checks published in July,

the FRC said KPMG's bank audits needed improvements for an
"unacceptable" third year running and the accounting firm will be
closely monitored.

https://www.reuters.com/business/finance/kpmg-faces-complaint-
providing-false-information-carillion-audit-2021-09-01/
Carillion auditor
KPMG faces
£250M
negligence
lawsuit
KPMG is facing a £250M lawsuit for alleged negligence in its audits of
Carilion before it collapsed in 2018.

The claim is being brought about by liquidators working for the UK

Government and it is the first time that such a claim has been made in this
country.

In legal documents submitted as part of its court application to access KPMG

documents, the official receiver claimed that Carillion’s board of directors
believed the business was “profitable and sustainable” as a result of KPMG’s
clean audit opinions.

They add that KPMG may be liable for £234.2M in dividends that were paid
out to Carillion’s shareholders between 2014 and 2016, as well as advisers’ fees
of £17M “which would not have been paid if the misstatements in the financial
statements had been detected by KPMG”.

KPMG has rejected the application for the documents. KPMG argue that
disclosing documents before the legal claim was filed was “unusual” and
“unnecessary” and that Carillion’s liquidators should rely on the company’s
own documents.

In relation to the proposed negligence claim, it said: “Carillion’s first task must
be to identify material misstatements in its own accounts. This is essential,
because without it there can have been no causative negligence.”

KPMG were responsible for auditing Carillion’s finances between 2013 and
2017, and are also under investigation by the Financial Conduct Authority.

20,000 jobs were lost and nearly 30,000 pensions compromised when
Carillion entered liquidation. The scale of their debt, £1.5bn in January 2018,
sat against 420 UK public sector contracts which the company was involved in
at the time of insolvency.
An initial inquiry by the Business select committee labelled Carillion’s
downfall as a “story of recklessness, hubris and greed. Its business model was
a relentless dash for cash, driven by acquisitions, rising debt, expansion into
new markets and exploitation of suppliers.”

Workers union Unite revealed the taxpayer funded up to £65M in redundancy

packages following Carillion's insolvency.
The FRC’s own investigation into the collapse was expected to report back
earlier this year but was pushed back until “summer 2020”.

The audit watchdog said the “scale and complexity of the case is exceptional”,
meaning it will take up to at least the summer of 2020 before the first stage is
published.

It first announced an investigation into Carillion’s finances when the

construction giant collapsed in January 2018. Carillion former group finance
directors Richard Adam and Safar Khan are also under investigation for their
roles in preparing the financial accounts for Carillion.
https://www.newcivilengineer.com/latest/carillion-auditor-kpmg-faces-
250m-negligence-lawsuit-15-05-2020/
UK watchdog finds apparent
breaches by KPMG's Carillion audit
LONDON (Reuters) - Britain's accounting regulator said it has delivered
its initial report into KPMG's audit of builder Carillion CLLN.L, an
indication that apparent rule breaches have been found.

The construction company’s collapse in 2018 angered lawmakers who

called on the Competition and Markets Authority to consider breaking
up top accountants to increase competition and auditing standards.

After an initial investigation, the FRC either closes the enforcement case
or, if apparent breaches have been found, delivers an Initial Investigation
Report.

In a rare statement reflecting the case’s high profile, the Financial

Reporting Council (FRC) said it has delivered an IIR on KPMG’s audit
of Carillion for the years ended 2014 to 2016, and additional audit work
in 2017.

A copy of the report, which has not been published, has been sent to
KPMG, one of the world’s Big Four auditors, for a response.

“We believe it is important that regulators acting in the public interest

review the audit work related to high profile cases such as Carillion and
we are cooperating fully with the FRC’s investigation,” KPMG said in a
statement.

“We can confirm we have received the Initial Investigation Report but
because the regulatory process is ongoing, we cannot comment further,”
KPMG said.

A key area of focus in the FRC’s investigation was the financial

performance of Carillion’s major contracts in both the construction and
services divisions, and whether Carillion management and its auditors
ensured that this was appropriately reported in its financial statements.

Once the FRC has received KPMG’s response, it will decide whether to
continue with the enforcement case or not. If the FRC continues with the
case, its findings and sanctions can be contested by KPMG at an
independent tribunal.

Fallout from Carillion and the collapse of retailer BHS is already being
felt in the audit sector with the Big Four firms having to tell the FRC
next month how they will ring fence their UK audit arms to help
improve standards.
https://www.reuters.com/article/uk-britain-accounts-carillion-
idUKKCN26C0UQ
Carillion inquiry:
missed red flags,
aggressive accounting
and the pension deficit
In a series of meetings the joint parliamentary committee grilled
Carillion directors, pension regulators and KPMG and Deloitte auditors
on accounting methods, problem contracts, and oversights. This is the
story so far.
In a series of scathing joint committee sessions MPs took to task Carillion
directors, pension regulators and KPMG and Deloitte auditors– grilling them
on missed red flags, aggressive accounting and the pension deficit
reaching nearly £1bn.

In a joint statement after the session probing Carillion directors, committee

co-chairs Rachel Reeves and Frank Field said: “This morning, a series of
delusional characters maintained that everything was hunky dory until it all
went suddenly and unforeseeably wrong.”

Reeves asked former CFO Zafar Khan if he had been “asleep at the wheel” for
remaining oblivious to Carillion’s mounting financial issues.
This was a similar theme to the session interviewing Carillion’s auditors, as
KPMG were grilled over why they had signed off on Carillion’s 2016 accounts
on 31 March 2017, just months before the construction company issued its
first profit warning in July and announced a £845m write-down in the value of
its contracts. Just six months later the company was insolvent, collapsing
with only £29m left in cash and over £1.3bn in debt.

In a post-hearing statement Field said: “I fear it is not only Carillion that is built
on sand: it is our whole system of corporate accountability.”

Missed red flags

At the crux of the committee’s line of questioning to the auditors was how the
assessment of Carillion’s accounts was able to change so drastically between
March and July.

MPs brought questions to Michelle Hinchcliffe, head of audit at KPMG, Peter

Meehan, Carillion’s external auditor from KPMG, and Michael Jones, Carillion’s
internal auditor from Deloitte.

Meehan attributed this dramatic re-assessment to the complex nature of the

contracts, the wide number of judgements needed to be made and a range of
developments that transpired between the March 2017 accounts sign-off and
the July profit warning.

MPs expressed incredulity that KPMG saw no red flags prior to March,
particularly in relation to several problem contracts in which debt was
mounting. Meehan said that he was aware the company had its challenges
but he believed it “had the reserves to deal with those challenges.”
Further red flags included the fact that Carillion stock was the most shorted
on the stock market, which auditors confirmed they were aware of at the time,
and that key investors such as Kiltearn and Standard Life Aberdeen (SLA) had
begun divesting as early as 2015.

SLA wrote to the committee explaining they began divesting “due to concerns
on a number of issues including strategy, financial management and
corporate governance.”

Referring to the increasingly tenuous position of Carillion, and KPMG’s

insistence that it only came to light between March-July 2017, Reeves
commented: “Investors seemed to know, people who worked for the company
seemed to know, the only people who didn’t see what was happening were
those who were paid to–  the directors and the auditors of the company.”

In a statement following the session, Reeves added that it seemed regulators

and auditors are “mere spectators – commentators at best, certainly not
referees – at the mercy of reckless and self-interested directors.”

When asked whether he would have done anything differently with the benefit
of hindsight, Meehan said: “I think me and my team all did the best we could
and I stand by the decision we gave on the 31 December 16 accounts.”

KPMG received £29m in audit fees from Carillion while Deloitte netted £11m.
Reeves said these audits “appear to be a colossal waste of time and money,
fit only to provide false assurance to investors, workers and the public.”

Problem contracts and cash flow constraints

The committee drew attention to four problem contracts that were at the root
of Carillion’s downfall – one in Qatar, the Royal Liverpool University Hospital,
the Sandwell Midland Metropolitan Hospital and the Aberdeen bypass.

Carillion directors and auditors pointed to the Qatar contract as a major factor
in the collapse, as the contract racked up £200m in unpaid bills and
exacerbated pre-existing cash flow problems.

Under questioning by MPs, former chief executive Richard Howson said he

was going to Qatar at least 10 times a year for the past six years to chase up
the money, describing that he “felt like a bailiff.”

Keith Cochrane, interim chief executive, added that the Qatar job had doubled
in size, the architect had been changed three times, and as a result it had
stretched from the original three years to six years. He said: “It had 2,500
design variations to it, and essentially we were not paid for 18 months prior to
the business failing.”

However, due to the nature of the contract, Howson explained Carillion could
not “wilfully abandon” the project despite not being paid, as Msheireb
Properties, the Qatari client company, would “pull the performance bonds.”

Peter Meehan admitted to visiting the site in 2014 and 2015, but not in 2016,
when issues surrounding the contract were escalating. Despite unpaid bills
piling up and auditors being aware of the problems surrounding the Qatari
contract, no provision was made in the March 2017 accounts, which said that
Msheireb owed a mere £70m in comparison with Carillion’s estimate which
was closer to £180m at the time.
When KPMG auditors were in the hot seat MPs also raised the issue that
Msheireb disputes the £200m bill, who claim that in fact they are owed that
figure.

MP Peter Kyle questioned Meehan over why this debt was not recognised in
the accounts signed off on in March 2017, asking incredulously: “You don’t
know whether your client was owed £200m or it owed £200m?”

He added: “I wouldn’t hire you to do an audit of the contents of my fridge.”

Msheireb Properties said that Carillion’s blame of the company was “deeply
troubling and inaccurate”, and as a result it was exploring all legal options.

Turning to the Liverpool hospital contract, worth £350m, MPs pointed to a

number of cracked beams that were discovered and had to be replaced.
Meehan admitted to not visiting the site after the issues were first flagged up
in November 2016, until a visit in January 2018.

Continued oversight seemed to be a persistent issue on both the part of

directors and auditors, but the reason these contracts had such a disastrous
impact on Carillion, as MP Heidi Allen pointed out to former directors, was
because “you had no means of dealing with that, because you were absolutely
on your knees financially the whole time.”

Frank Field said the discovery of cracked beams was “a perfect parable for
the whole company– the cracks were visible long before the directors or
auditors admit”.

Aggressive accounting, revenue recognition and goodwill

Former CFO Emma Mercer said that after three years working in Canada she
returned to the UK in April 2017, to find “a slightly more aggressive trading of
the contracts than I had previously experienced in the UK before I left.”

Referring to the practices she inherited from predecessor Zafar Khan, Mercer
added: “What I saw when I returned to the UK is that both the number of
contracts we were taking judgment on and the size of those judgments had
increased.”

When MPs asked the auditors whether they recognised these practices,
Meehan said “I personally would not use the word more aggressive” but said
that he told Carillion directors that on the spectrum of cautious to optimistic,
they had moved towards the optimistic end when it came to appraising
“riskier contracts”. He said that despite raising this concern, management
said they were happy with their position.

Zafar Khan insisted “I do not believe that there were any instances of earnings
manipulation” and said that the numbers were reached after making a range
of judgements using the information available at the time.

In the 9 July assessment KPMG concluded there was a general lack of

consistency around how the group recognised value on claims, with claims
being booked earlier in comparison with others in the industry. Meehan was
steadfast that this only came to light after the March sign-off.

The auditors clarified several times during the session that their role was to
assess management’s judgements, rather than make their own.
When Michelle Hinchliffe was asked where the line lies between aggressive
accounting and fraud, she cited a range of factors to consider, including
management overriding controls and a shift from cautious to optimistic
judgements. However, she stopped short of saying whether any of these
practices at Carillion had become inappropriate, stating these are simply
factors to probe.

The Financial Reporting Council’s (FRC) investigation into KPMG’s role as

auditor is ongoing and will look at the “recognition of revenue on significant
contracts” among other issues.

MPs noted that issues with revenue recognition in KPMG’s audits had
previously been flagged up by the FRC, as well as “insufficient testing of the
reliability of cash flow within the impairment assessment of goodwill” in other
audits between the years 2014-2017.

Carillion’s high reliance on goodwill in valuing its assets was also a problem
referenced by MPs. Ruth George pointed out to Carillion directors that in 2016
“84% of your balance sheet was made up of goodwill”, amounting to £1.57bn,
which essentially disappeared overnight when the company’s troubles came
to a head. In Carillion’s 2016 accounts it is stated that management decided
that no impairment to goodwill was necessary.

Hinchcliffe clarified that it is not the auditors responsibility to calculate

goodwill, but rather to assess management’s judgements of it.

However, she added that new processes surrounding the testing of goodwill
had been implemented at KPMG since October 2017, and that the firm has an
ongoing internal investigation into the audits of Carillion.
Pension deficit nearing £1bn

Carillion’s collapse put thousands of jobs at risk and jeopardised the pensions
of around 27,000 individuals, resulting in a £990m pension deficit.

MPs questioned former executives and The Pensions Regulator (TPR) over
whether it was worrying that the company was paying “mega dividends” and
large bonuses while such a large pension deficit persisted and continued to
grow. In late 2017 Carillion’s contribution payments to the pension scheme
were deferred.

Zafar Khan, former financial director of Carillion, explained that due to cash
flow constraints decisions had to be made about the “allocation of that
between the pension scheme, the dividend and re-investment in the business.”

MPs pointed to the fact that in 2016 higher dividends were paid than the
previous year. Put simply, MP Andrew Bowie said: “You were prioritising the
share price and dividend over funding the pension scheme.”

A 15 year deficit recovery plan was agreed with trustees, which MPs said
seemed unacceptably long. When queried over how many other existing
recovery plans are over 10 years long, TPR could not answer.

MPs took a hard line with TPR for their inaction, who said they threatened to
use their Section 231 powers but never actually did. They attributed this to the
assessment of Carillion’s “strength of covenant”, which led them to believe
the pension deficit would be addressed in time.
TPR did finally launch an anti-avoidance investigation into Carillion, but three
days after the firm’s collapse.

Big Four oligopoly

In the years leading up to Carillion’s collapse the Big Four firms banked a total
of £72m from it, leading MPs to accuse them of “feasting on what was soon
to become a carcass.”

Field asked the auditors whether the committee should recommend breaking
up the Big Four due to an “oligopoly” in the industry.

MPs questioned whether the dominance of the four firms was a problem,
especially considering the fact that KPMG audited Carillion, investor SLA, The
Hospital Company and the pension scheme. Not only was KPMG responsible
for a range of interlinked audits, Peter Meehan specifically was the partner in
charge of several of these. MPs asked whether this was a conflict of interest
and something that would prevent an auditor from remaining impartial.
Meehan said this was not unusual.

A further potential source of conflict lies in the fact that two former financial
directors of Carillion were previously with KPMG, including Emma Mercer.

Michael Jones disagreed, saying “it didn’t feel like a cosy club”. He added that
while audit share of FTSE 100 companies does tend to be split between the
Big Four, there is competition in other areas.

The inquiry continues, and pressure on Carillion’s former directors and its
auditors shows no signs of letting up. With directors and auditors insisting
they were taken by surprise by the company’s rapid decline, the joint
committee will soon determine whether Carillion’s collapse could have been
foreseen and prevented, and to what degree of responsibility each party
should be held.

https://www.accountancyage.com/2018/02/26/carillion-inquiry-missed-red-lights-aggressive-
accounting-pension-deficit/
Regulator hits KPMG
with £3m fine for
“serious” audit
misconduct
The sanctions relate to the firm’s audit of Conviviality PLC between
2017 and 2018

KPMG and one of its former senior auditors have been sanctioned by the UK’s
accounting watchdog for “failings” during the audits of retail giant
Conviviality.

Imposing a £3m fine, the Financial Reporting Council (FRC) identified

numerous areas of misconduct in relation to the Big Four firm’s 2017 audit of
the company, including a “failure to obtain sufficient appropriate audit
evidence”.

Nicola Quayle, the partner in charge of the Conviviality audit, received a

£110,000 fine and a severe reprimand.

“The audit failings in this case were serious and spanned several significant
areas of the financial statements and related to a number of fundamental
auditing standards,” said Claudia Mortimore, deputy executive counsel to the
FRC.

“The sanctions reflect the seriousness of the failings.”

Also among the misdemeanours cited by the FRC were a failure to revise
initial assessments of the risks of material misstatement to financial
statements, a failure to apply sufficient professional scepticism in relation to
the recognition of accrued franchise licence revenue, and a failure to
adequately document audit procedures.

Conviviality was a major player in the UK retail market. Specialising in

alcoholic drinks, it oversaw the Bargain Booze, Wine Rack and Bibendum
chains, and supplied drinks to hospitality franchises such as JD Wetherspoon
and Yates.

The company floated on the London Stock Exchange in 2013 and experienced
a period of rapid growth before entering administration in April 2018.

Mortimore also noted that the “poor regulatory track record of each of the
respondents” was a factor in determining the sanctions, with this being the
latest in a series of blows to KPMG’s reputation as an auditor.

The firm is currently being investigated over claims that it misled the FRC by
forging documents during checks of its Carillion audits.

Meanwhile, the FRC’s investigation of the Carillion audit is ongoing and could
result in another fine.
KPMG was also fined £13m last year for “grave misconduct” in advising the
private equity sale of bed manufacturer Silentnight.

Commenting on the Conviviality audit sanctions, Jon Holt, CEO of KPMG in the
UK, said: “I’m sorry that our work wasn’t good enough in this instance. I am
committed to resolving, and learning from, our past cases and this
development marks another step forward in dealing with these matters.  We
have fully cooperated with the FRC throughout their investigation.

“We continue to invest significantly in our business, taking action to address

the FRC’s findings and implementing our Audit Quality Transformation
Programme, which includes comprehensive new training, controls and
technology.”

https://www.accountancyage.com/2022/01/20/regulator-hits-kpmg-with-
3m-fine-for-serious-audit-misconduct/
KPMG says accounting regulator ‘was
misled’ over Carillion audits
Chief executive apologises for ‘unacceptable’ misconduct as
disciplinary tribunal begins
KPMG has apologised for misconduct and misleading the UK’s accounting regulator
after former auditors were accused of “forgery” related to audits including that
of Carillion, the major government contractor that collapsed four years ago.
Jon Holt, the chief executive of KPMG UK, said it was “clear” that misconduct had
occurred, in a statement published to mark the start of a disciplinary tribunal on
Monday.
The Financial Reporting Council (FRC) has alleged that KPMG misled its investigators
over routine inspections of the audits of Carillion and the sofware company Regenersis,
in 2016 and 2014 respectively. The FRC has alleged that “relevant individuals acted with
a lack of integrity in dishonestly or recklessly misleading the regulator”, according to
tribunal documents.

The tribunal on Monday heard via a public video call a number of allegations of
“forgery” by KPMG’s auditors, including the “fabrication” of documents. The FRC’s
counsel, Mark Ellison, told the tribunal that auditors manufactured spreadsheets and
minutes of meetings to appear as if they were created during the audits, when in fact
they were created months later, and then presented as genuine to inspectors.

Carillion collapsed in January 2018, resulting in 3,000 job losses and causing
chaos across the 450 public sector projects in which its services were used. The collapse
of the company, which had £7bn of debt, turned into one of the highest-profile
accounting scandals in recent years.
Parliamentary committees have said KPMG was “complicit” in Carillion’s “questionable”
accounting practices, including “complacently signing off its directors’ increasingly
fantastical figures”. However, the tribunal will not investigate the circumstances of
Carillion’s collapse.

KPMG reported the alleged misconduct to the regulator, although it remains a party to
the disciplinary tribunal alongside former partners and employees. The other
respondents have denied allegations of misconduct.

Holt said: “It is of course for the tribunal to reach a conclusion on the allegations as they
relate to the individuals concerned. Nevertheless, it is clear to me that misconduct has
occurred and that our regulator was misled.”

Holt said the alleged misconduct was “disturbing and upsetting for me and for my
colleagues” and was “a violation of our processes and clearly against our values”.

“It is unacceptable, we do not tolerate or condone it in any way, and I am very sorry that
it occurred in our firm,” he said.
The tribunal is expected to hear evidence over the course of several weeks from the FRC,
KPMG and the individual respondents. They included Peter Meehan, who was KPMG’s
lead partner on the Carillion audit, and Stuart Smith, the lead partner on the Regenersis
audit. Lawyers for Meehan and Smith did not respond to requests for comment.

If the tribunal finds that wrongdoing has occurred it has the power to impose unlimited
financial sanctions on firms or individuals. It also has the power to ban people from the
audit profession.

Alistair Wright, a KPMG group senior manager, denied allegations of misconduct

relating to Regenersis, in a summary of his position sent by his lawyers. He admitted
“dishonest” conduct in relation to Carillion because he intended “to increase the risk
that the […] inspection team would be misled” on when documents had been created,
but denied the allegation that the content of the minutes was false or misleading.

Richard Kitchen, who was an audit manager of Carillion, strongly denied the allegations
of misconduct. He said via his lawyer that he welcomes the opportunity to give his
account to the tribunal. Adam Bennett, a former senior manager, denied all allegations
of misconduct against him via his lawyer. Pratik Paw, an assistant manager, strongly
denied all of the allegations against him.

https://www.theguardian.com/business/2022/jan/10/kpmg-says-
accounting-regulator-was-misled-over-carillion-audits
Carillion tribunal: KPMG ex-partner denies
forging documents
Evidence focuses on KPMG’s ‘misleading’ disclosures about audit of
company that collapsed in 2018

An ex-partner of KPMG sought to portray himself as negligent because it was the “lesser
of two evils”, a tribunal heard today, as former employees of the big four accounting firm
gave evidence about its audit of collapsed outsourcer Carillion.
The tribunal is investigating claims made by the Financial Reporting Council, which
regulates accountants, that KPMG and its staff misled FRC inspectors by forging
documents in relation to its work on the accounts of Carillion and a software company,
Regenersis.
On Tuesday, the FRC published a settlement with KPMG and its former employee Stuart
Smith over the 2014 Regenersis audit. Smith will pay a fine of £150,000 and is barred
from accountancy for three years, while KPMG is liable for a sanction that will be
determined after the tribunal.

As the tribunal continued on Tuesday, much of the evidence focused on KPMG’s

“misleading” disclosures to the FRC over its audit of Carillion.

Carillion collapsed with £7bn of debts in January 2018, resulting in 3,000 job losses and
causing chaos across hundreds of its projects – including two big hospitals, schools,
roads and even Liverpool FC’s stadium, Anfield.

KPMG has admitted misleading the FRC during routine checks on the quality of its audit
but former staff members accused of misconduct by the FRC disagree over who was to
blame.

They include Peter Meehan, one of the most senior staff members, known as partners.
He was suspended by the company in 2019 and left in 2021.

On Tuesday, Meehan repeatedly denied being involved in the alleged falsification of

documents.

He had earlier told the tribunal that he was “shocked and devastated and angry” to find
that members of his team had allegedly duped the regulator.

Fionn Pilbrow, acting for one of Meehan’s team, Richard Kitchen, said Meehan knew
about the alleged forgery of documents but “sought to paint a picture of yourself as just
a negligent auditor” because it was the “lesser of two evils”.
“Your evidence now is untrue and like all the evidence you’ve given, trying to distance
yourself from your team,” said Pillbrow.

Meehan denied this.

The FRC alleges that Kitchen, an audit manager of Carillion, edited a key formula in a
spreadsheet handed to the FRC, to increase a threshold for scrutiny of contracts from
£300,000 to £1.5m.

The change ruled out a large number of contracts that would have been flagged, and
avoided uncomfortable questions on why more contracts had not been scrutinised, the
FRC alleged.

Kitchen strongly denies all wrongdoing. Pilbrow has argued that Kitchen was following
Meehan’s directions, and that he did not knowingly make false representations to the
regulators.

Alistair Wright, a KPMG group senior manager working under Meehan, has already
admitted “serious misconduct”.

But lawyers for Meehan have argued that he was a “patsy” for actions carried out by
members of his team. The tribunal continues.

https://www.theguardian.com/business/2022/jan/18/carillion-tribunal-kpmg-audit-
documents-forging
JUNIOR KPMG AUDITOR IN CARILLION CASE UNAWARE HE WAS
DOING ANYTHING WRONG, TRIBUNAL HEARS

Regulator alleges six kpmg staff ‘fabricated’ documents after questions from its inspectors about
audit of uk outsourcer

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https://www.ft.com/content/fe6d8531-9cb1-4e05-b7b0-ec4b1378527a

The most junior member of the KPMG audit team accused of forging documents to mislead
regulators inspecting its work for UK outsourcer Carillion was unaware he was doing anything
wrong, a tribunal has heard. Lawyers for Pratik Paw said the former KPMG employee had also
cited the firm’s hierarchical structure and his minority ethnicity in his defence. The claims were
made on the third day of an industry tribunal on allegations by the Financial Reporting Council
that Paw and five more senior KPMG colleagues forged documents following questions from its
inspectors. The auditors then passed off “fabricated” documents to give the impression they had
been created during the audit of the 2016 financial statements of Carillion, it is alleged. The
outsourcer collapsed in January 2018 with liabilities of £7bn. Lawyers for Paw, who denies
wrongdoing, said he was a 25-year-old junior employee and was not yet a qualified accountant at
the time of the inspection of the Carillion audit in 2017. Following questions from FRC
inspectors, Paw was asked by colleagues to type up minutes based on handwritten notes of
meetings senior colleagues held with overseas auditors, his lawyers said. A senior colleague later
sent the minutes to the inspectors, the tribunal heard. Scott Allen, Paw’s barrister, said his client
had not attended the meetings, but did not raise concerns because he was unaware that what he
was being asked to do was wrong. He had received no training on FRC quality inspections and
trusted his more senior colleagues, “which was an essential part of his training and the hierarchy”
of KPMG, Allen said. Outlining the context of Paw’s involvement in the alleged wrongdoing,
Allen said: “He points to his junior position in a very hierarchical structure and atmosphere. He
points to his minority ethnicity within that hierarchical structure and atmosphere.” Allen
compared Paw to “a very junior cog in a very fast-moving and intricate machine”. Paw was also
busy with other work and believed he was being asked to carry out the tasks “quickly and
without fuss”, Allen said. These factors meant that the junior employee was “hyper-focused” on
the task in front of him so did not identify that he should challenge what he was being asked to
do, Allen said. It followed submissions to the tribunal on Tuesday by KPMG’s barrister James
Brocklebank QC, who said that any wrongdoing had been “the product of individual conduct”
and that there was “no systemic problem” at the firm. The accused auditors had received
training, but “no ethical training was required to tell staff not to lie”, he added. KPMG has said
the FRC was misled by the auditors, all of whom have since left the firm. The other defendants
— Peter Meehan, the lead partner on the Carillion audit, Alistair Wright, Richard Kitchen and
Adam Bennett — have also denied allegations of misconduct. Another auditor, Stuart Smith, has
settled with the FRC. The hearing continues. https://www.ft.com/content/fe6d8531-9cb1-4e05-
b7b0-ec4b1378527a