Shadow of Carillion collapse looms over KPMG

Tribunal into Big Four auditor’s actions leaves Jon Holt struggling to pick up the pieces after less than a year in the job

Jon Holt has been fighting fires for nine months. The chief executive of KPMG UK has - to name a few - dealt with a slapdown over the quality of its banking audits, paid millions for its handling of a mattress company’s insolvency - and this week, admitted his firm misled the accounting watchdog over outsourcer Carillion.

It was early November 2018, almost three years before Holt took over at the helm, when bosses at KPMG realised they had a major problem on their hands. 

After reviewing material sent to the accounting watchdog regarding its 2016 audit of collapsed outsourcer Carillion, they discovered six of their auditors had potentially manufactured documents to purposely mislead inspectors. 

The Big Four accounting firm swiftly ordered its solicitors, Orrick, Herrington & Sutcliffe, to inform the Financial Reporting Council (FRC) of the alleged breach. The letter, dated November 7, said: “Documents previously thought to have been prepared during the 2016 year-end audit were in fact prepared later, in October 2017.”

It kicked off a series of events that led to the suspension of the six auditors - all of whom have now left the firm - and culminated in a rare disciplinary tribunal that kicked off this week. 

The hearing has allowed lawyers to very publicly air KPMG’s dirty laundry in painstaking detail, leaving the already embattled firm reeling. And sitting at the helm is Holt, in charge of picking up the pieces.

The chief executive embarked on something of a damage limitation exercise on the first day of the hearing, saying he believed the firm’s auditors did mislead FRC inspectors and apologising for their actions.

But the incident only adds to the growing list of very serious issues Holt has been forced to deal with during his brief yet tumultuous nine months leading KPMG, raising questions about the firm’s culture and threatening to further damage its reputation. 

Since he took over last April, KPMG has also been handed a £13m fine for serious misconduct in its handling of the insolvency of mattress company Silentnight; pulled up by the FRC over the quality of its banking audits; and dropped out of bidding for public sector contracts following criticism from the Cabinet Office.

So how bad could the tribunal be for KPMG and its reputation? Very, according to at least one senior industry source.

“This doesn’t quite appear to be KPMG’s Enron moment that craters the firm, but it’s not far off,” he says. 

A spokesman for the firm says it takes the issues raised in the tribunal extremely seriously, but disagrees with the Enron comparison - a scandal which led to the collapse of its auditor Arthur Andersen and reduced the Big Five to the Big Four in the process.

The watchdog has accused the six KPMG auditors of creating “forged” and “fabricated” documents in an attempt to mislead inspectors reviewing the firm’s audits of Carillion and Regenersis, another outsourcer.

The tribunal was told that the auditors created a spreadsheet and minutes of meetings to make it look like they were put together during the audit, but the documents were actually manufactured months after it took place. 

Carillion was given a clean bill of health by KPMG before going bust in 2018 under the weight of a £7bn debt pile, in one of Britain's biggest corporate collapses for decades.

The tribunal has so far heard opening submissions from lawyers representing the FRC, KPMG and the defendants. But proceedings quickly descended into open conflict with the defendants seeking to blame each other for the alleged breaches. 

Peter Meehan, the partner responsible for auditing Carillion, said on Tuesday that he was “let down” by junior colleagues and “could not have been involved” in preparing forged documents as he was on a shopping trip with his wife when a key meeting occurred. Louise Meehan is expected to give evidence as a witness during the tribunal. 

Meehan’s lawyer added that if people had to second-guess junior colleagues “in some sort of Stasi fashion . . . then economic commercial life would not function”. 

Yet Lord Prem Sikka, a Labour peer and accounting professor, says it is “easy to scapegoat junior colleagues”, and doing so points to serious leadership problems within an organisation. 

The senior industry source agrees: “Laying the blame at the door of audit juniors misleading their lead partner on the Carillon account is an especially poor look and speaks to a cultural problem right at the top of the partnership.” 

It is not the first time Meehan’s professional abilities have been questioned. In 2018, during a parliamentary hearing on Carillion in 2018, he was famously told by Labour MP Peter Kyle that he would not hire him “to audit the contents of my fridge”. 

The first week of proceedings also shed light on KPMG’s alleged “hierarchical structure”, with Pratik Paw, the most junior member of KPMG’s team auditing Carillion, citing his “minority ethnicity” status and lack of experience as a defence against allegations that he forged documents.

Scott Allen QC, Paw’s barrister, told the tribunal that his client had been “a very junior cog in a very fast-moving and intricate machine”.

Allen added: “[Paw] points to his junior position in a very hierarchical structure and atmosphere. He points to his minority ethnicity within that hierarchical structure and atmosphere.”

According to the case, Paw was asked by senior colleagues to conjure minutes of meetings based on handwritten notes that took place months in the past, despite not having attended these meetings himself. These were then sent to FRC inspectors by another colleague.

KPMG has admitted that it misled regulators over the audit of collapsed outsourcer Carillion Credit: Reuters

Lawyers for KPMG denied the firm had any “systemic problem”. Paw, Meehan and three other former KPMG auditors deny the allegations. One auditor settled with the FRC last week.

However, Paw’s claim will also raise concerns of longstanding cultural issues within the firm that came to a head last year when former boss Bill Michael told staff who complained about working conditions amid the pandemic to “stop playing the victim card”. 

Michael, once likened to Donald Trump by insiders, also called unconscious bias training “complete crap”. He stepped down in February following the remarks, leaving Holt to clean up the firm’s image.  

That, however, has proven to be a difficult task given the extent of the problems in his intray and such a list of problems is having on morale.

Atul Shah, a professor of accounting and finance at City, University of London, says the issues raised this week at the tribunal point to a “deep, systemic problem” within KPMG. 

Last month, Bina Mehta, KPMG’s chairman, said she has never experienced a period like it during her 30 years at the firm, adding that “it feels difficult”. 

“It’s not just about how it makes me feel as a partner but how does it make colleagues feel, because their family and friends ask them questions,” she told the Sunday Times.

With the firm on the defensive, Holt has struggled to move past what he repeatedly calls “legacy issues” while KPMG has hired crisis management firm Kendal Advisory to handle its communications for the tribunal.

KPMG, meanwhile, has accepted vicarious liability for the actions of its auditors, meaning it will likely face a fine once the FRC tribunal has concluded. 

Yet some do not think this goes far enough. Lord Sikka argues that considering the firm is a “habitual offender”, the regulator should ban it from winning audit clients for several years.

He adds: “What KPMG did was premeditated, it wasn’t an accident…The FRC has solely depended on fines to sanction the firms… which has just emboldened [them].”  

Issues within the audit industry are clearly not confined to one company. Lord Sikka points to the £6.5m fine handed down to PwC in 2020 for signing off the accounts of doomed department chain store BHS. 

“These malpractices are all around us. Other firms have not been pristine but KPMG is the one that has been caught,” he adds. 

The hearing continues.