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.
Carillion relied on major contracts, some of which proved much less lucrative than it thought.
In 2018 it slashed the value of them by £845m, of which £375m related to major public-private partnerships (PPPs) such as Royal Liverpool University hospital.
As its contracts underperformed, its debts soared to £900m.
The company needed a £300m cash injection, but the banks that lent it money refused to put more in.
The government also refused to step in and bail the firm out.
That left the company unable to continue trading and forced it to go into liquidation.
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.
What was Carillion?
The Wolverhampton-based firm was second only to Balfour Beatty in size.
It was spun out of the Tarmac construction business in 1999 and steadily took over rivals, such as Mowlem and Alfred McAlpine. It expanded into Canada and built a construction arm in the Middle East.
Carillion then diversified into outsourcing, taking on contracts such as running the mailroom at the Nationwide building society to helping upgrade UK broadband for BT Openreach. It took over running public service projects, ranging from prison and hospital maintenance to cooking school meals. In 2017 a third of its revenue – £1.7bn – came from state contracts. It employed 43,000 people, with more than 19,000 in the UK.
Notable construction projects
• GCHQ government communications centre in Cheltenham (2003)
• Beetham Tower, Manchester (2006)
• HS1 (2007)
• London Olympics Media Centre - now BT Sport HQ (2011)
• Heathrow terminal 5 (2011)
• The Library of Birmingham (2013)
• Liverpool FC Anfield stadium expansion (2016)
Government contracts
• NHS – managed 200 operating theatres; 11,800 beds; made 18,500 patient meals a day
• Transport – “smart motorways” to monitor traffic and ease congestion; work on HS2; track renewal for Network Rail; Crossrail contractor
• Defence – maintained 50,000 armed forces’ houses; a £680m contract to provide 130 new buildings in Aldershot and Salisbury plain for troops returning from Germany
• Education – cleaning and meals for 875 schools
• Prisons – maintained 50% of UK prisons.
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.
