Key investors in Carillion raised questions about KPMG’s auditing role in the 2016 accounts that failed to reveal any problems just four months before the £850m writedown.
They also highlighted a lack of competition in the audit industry with the big four accountants dominating the industry, and many firms holding long tenures with firms, in the case of KPMG had seen the firm engaged as Carillion auditors since 1999.
Major investors, Aberdeen Standard Investments, Kiltearn and Blackrock were quizzed by the joint select committees about their concerns in the wake of the collapse.
Murdo Murchison, chairman of Kiltearn Partners, criticised the audit of the 2016 accounts given that incoming Carillion Construction finance chief Emma Mercer then quickly uncovered significant problems on a raft of major contracts.
“I remained puzzled by the fact that someone can be six weeks in a job and discover issues with contracts that have been approved by accountants we are now told are sloppy.
“These appear internally to be issues that were hidden in plain sight, but were not evident to the auditors. That is a puzzle that has yet to be solved.
He added: “I’m extremely frustrated with the audit performance. We rely heavily on audited financial. The disclosure of minutes that raise question marks about whether this was sloppy, aggressive accounting or very aggressive accounting, none of these should be associated with a healthy audit.”
“A company burns through £850m of cash in one year having apparently for many years generated reasonable amounts of cash flow then there is clearly a case to answer. There must have been prior issues that weren’t presented to investors.
He added that the FTI Consulting report into Carillion’s problems for its banks provided very strong evidence that issues were pre-existing over a number of reporting periods.
“On evidence of the last few months it seems quite clear that there is a case to answer here.
“From minutes from board meeting in August 22. It is clear there were pre-existing issues. you had a company with a culture of meeting the numbers, and when ever have a meeting the number type culture, people will push the accounting to hit short-term targets.
Aberdeen Standard Investments revealed the flashing red signs which made begin to sell its 12% stake Carillion much earlier than other investors.
ASI’s global head of stewardship and ESG investing Euan Stirling said red lights flashed as debt levels grew every year and every half-year as the company failed to convert profitability into cashflow and it continued to invest in acquisitions that were adding to the debt pile every year.
He said: “I met chairman Phillip Green in 2014 and 2015. Felt non-executive support was there for the Carillion strategy but the challenge was lacking, which gave us the firm opinion that whatever we were saying to company that strategy would be pursued for a number of years to come and we were dissatisfied with that.”
The folks closest don’t seem to have any liability. Need to look much more closely at the tenure of auditors of companies. The fact that KPMG since 1999.
There appears to be a lack of competition in a key part of the financial system that periodically causes a lot of other participants in that system a lot of trouble. Therefore I would like to see more competition.”
“When we looked at 2016 results. The picture painted on the first couple of pages of results was not supported by information that lay deeper in the accounts.
“So for example the use of reverse factoring to support a stated debt level that flattered the company’s financial position was revealed later in the accounts.”
Blackrock managing director Amra Balic told the Committees that it became clear during its most recent conversation with Carillion board members that greater attention was being paid to bonuses than to the deterioration of the business.
“It seems that the board was focusing more, thinking again how to remunerate executives rather than actually what was going on at the business.
“Definitely too much focus at the board level around remuneration.”
She also revealed clients invested in shorted funds managed by Blckrock made £36m between 2013 and January 2018.
from Construction Enquirer http://www.constructionenquirer.com/2018/03/07/carillion-investors-question-kpmg-auditing/
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