EDDC’s recent external auditor facing fourth inquiry; regulator “feeble and timid”

“The accounting watchdog has launched an investigation into KPMG’s audit of Conviviality, the collapsed drinks and off-licence supplier.

It is the latest regulatory scrutiny into the Big Four firm, which is also under investigation over its audits of Carillion, Rolls-Royce and BNY Mellon.

The Financial Reporting Council has accused KPMG of an “unacceptable deterioration” in the quality of its audits and put its audits under special supervision. Last month it fined the firm £3.2 million for misconduct in its audits for Quindell, the insurance technology company. Pressure is increasing on KPMG and its competitors PWC, Deloitte and EY. Carillion and BHS shone a spotlight on the firms’ roles as both auditors and consultants to companies.

Conviviality, owner of the Bargain Booze and Wine Rack chains, collapsed into administration in April. It had been valued at more than £500 million in March but fell from grace after admitting that it had made an error in its forecasting and had found a £30 million tax bill due by the end of the month. It had 4,000 employees and 760 stores. Almost 2,000 jobs were saved when C&C acquired the wholesale business from the administrator. Bestway bought the retail business. The FRC is looking at financial statements for Conviviality in the year to the end of April 2017.

A spokesman for KPMG said: “We believe we conducted our audit appropriately. As reported by the company, it experienced margin weakness at the start of 2018 and also a significant payment to HMRC which had not been included within its short-term cash-flow projections, creating a short-term funding requirement.”

The FRC said that it would also investigate a member of the Institute of Chartered Accountants in England and Wales over the preparation and approval of Conviviality’s financial statements but did not name the individual.

This investigation comes as the FRC, the ICAEW, and the industry-backed Audit Quality Forum prepare to launch a government-backed review that will consider the effectiveness of the existing model for auditing. They are looking for an independent business leader to lead the review.

Bill Michael, who took over as head of KPMG UK in September, supports a review. “The profession needs to be re-evaluated, otherwise we run the risk of eroding trust,” he told The Times . “We can’t have a profession that isn’t trusted. It has consequences for society and the capital markets. You only need one bad apple to lose trust in the system.”

KPMG UK employs 15,000 partners and staff, 3,600 of whom work in its audit practice. Its tax consulting, deal advisory, management and risk consulting practices have grown in recent years and now employ about 7,500 staff.

The FRC is the subject of a parliament-led review which is expected to overhaul how the FRC works and shake up the accountancy profession. MPs looking at Carillion’s collapse accused regulators of being “feeble and timid”.”

Source: Times (pay wall)

“KPMG singled out in critical report on audit industry”

KPMG were, until recently, the auditors of East Devon District Council. Let’s hope that Grant Thornton (now back in the frame at EDDC) perform better – but who recalls their pitiful performance when they “investigated” the disgraced Councillor Graham Brown affair and found ….. nothing.

“KPMG, the accounting firm that signed off the books in the years leading up to Carillion’s collapse, has been singled out by the industry regulator in a report that says the overall quality of the audit profession is in decline.

The Financial Reporting Council, the watchdog for the UK’s accountants, said the profession had demonstrated a “failure to challenge management and show appropriate scepticism across their audits”.

There have been calls for the “big four” accountants – KPMG, PricewaterhouseCoopers, EY and Deloitte – to be broken up to spur competition and improve standards.

All four gave Carillion financial advice before the construction and outsourcing company failed. MPs accused the four of “feasting” on Carillion, whose finances proved far less healthy than directors had suggested.

The FRC reported a decline in the quality of the work of all four, with KPMG performing the worst. The watchdog is already investigating KPMG over its role in the collapse of Carillion and it said on Monday there had been an “unacceptable deterioration” in the quality of its work.

The FRC cited figures that showed half of KPMG’s audits of firms in the FTSE350 index had required “more than just limited” improvements, up from 35% in the previous year.

“The overall quality of the audits inspected in the year, and indeed the decline in quality over the past five years, is unacceptable and reflects badly on the action taken by the previous leadership, not just on the performance of frontline teams,” the regulator said.

“Our key concern is the extent of challenge of management and exercise of professional scepticism by audit teams, both being critical attributes of an effective audit, and more generally the inconsistent execution of audits within the firm.”

It added: “[KPMG] agrees that its efforts in recent years have not been sufficient; the FRC will hold KPMG’s new leadership to account for the success of their work to improve audit quality.” …

The FRC said it would now scrutinise KPMG more closely as a result of its findings. It will inspect 25% more KPMG audits than before and monitor the firm’s plans to improve the quality of its work.

In the FRC’s overall assessment of eight accountants, it found that 72% of audits of all firms, including those outside the FTSE350, required no more than limited improvement, down from 78% last year. While only half of KPMG’s FTSE350 audits were deemed satisfactory, rivals scored far higher, although all showed declines and fell short of the FRC’s target of 90%.

Deloitte scored 79%, down from 82% last year, EY fell from 92% to 82% and PwC was down from 90% to 84%. The four firms immediately below the big four – BDO, Mazars, GT and Moore Stephens – were told that the quality of their audits had generally improved.”

https://www.theguardian.com/business/2018/jun/18/kpmg-singled-out-in-critical-report-on-audit-industry

Auditers: can they understand mathematics let alone accounting?

KPMG audited EDDC accounts until recently.

“Accounting watchdog fined KPMG 3.2 million pounds on Monday for failings in its audit of Quindell Plc, after the legal services firm twice restated its accounts leading to heavy losses. …

The fine in Britain comes as the global network of accounting firms that make up KPMG is under pressure. It is facing an inquiry in Britain over its audit of failed outsourcer Carillion and scrutiny of its South African arm’s work for a company owned by the Gupta family.

The ‘big four’ accounting firms, including KPMG, are facing calls to break up into smaller parts from lawmakers in Britain who allege their dominance of the market means they do not sufficiently challenge clients’ claims about their accounts.

THe FRC is also investigating KPMG’s auditing of the collapsed construction and outsourcing firm Carillion.

Once close to being one of Britain’s blue chip financial firms, the AIM-listed Quindell saw its market value collapse in 2015 after regulators launched probes into its financial accounts.

Quindell, which has since been rebranded as Watchstone, is still being probed by Britain’s Serious Fraud Office and the FRC over its business and accounting practises.

KPMG’s fine was discounted from an original 4.5 million pounds and Smith’s from 120,000 pounds because they chose to settle the case, the FRC said.”

http://flip.it/K0.u3P
Source: Reuters

Privatisation and outsourcing: beware ‘delusional’ directors, blind auditors and absent regulators

“Frank Field, chairman of the Work and Pensions Committee, said: “A board of directors too busy stuffing their mouths with gold to show any concern for the welfare of their workforce or their pensioners.”

For a longer and even more critical report published after this article, see:
http://www.bbc.co.uk/news/business-44129678

“The directors of Carillion should be formally investigated after overseeing a “rotten corporate culture” and may warrant disqualification from holding boardoom roles in the future, a House of Commons inquiry has concluded.

A damning 101-page report into the collapse of the public services contractor, undertaken by the joint business and work and pensions select committees, has identified failings by regulators, the accountancy firms KMPG and Deloitte and the government, as well as the company’s directors.

The government called the Official Receiver into Carillion four months ago after banks and investors refused to support the group, which had annual turnover of £5 billion and 43,000 employees. It collapsed with £2.6 billion of pension liabilities and about £2 billion of debts with suppliers and lenders. Its demise left serious issues over the delivery of maintenance, catering and cleaning contracts in schools, hospitals and military bases.

The company blamed its financial crisis on failing construction contracts, including those to build hospitals in the West Midlands and on Merseyside, a new motorway in Scotland and developments in Doha ahead of the 2022 World Cup finals in Qatar.

The MPs’ report recommends that:

•The Insolvency Service investigate “potential breaches of duties under the Companies Act” and claims of “wrongful trading” that could lead to “action for disqualification as a director”;

•The intervention powers of the Financial Reporting Council should be beefed up and its remit be extended to company directors that are not accountants;

•The Competition and Markets Authority should investigate the Big Four accountancy firms and consider that they be broken up;

•The Prompt Payment Code for suppliers should be reviewed after Carillion’s flagrant abuse of it;

•The “Crown representative” system used to oversee large public services contractors should be reviewed after it appeared to pick up no warning signals about Carillion’s financial crisis;

•The leadership of The Pensions Regulator should be is shaken up to make sure that it takes “harsher sanctions” against companies such as Carillion that fail to properly fund their retirement schemes.

The damning report will cast a shadow on the careers of the grandees on the Carillion board: Philip Green, the former United Utilities and P&O boss who was chairman; and Keith Cochrane, the former chief executive of Weir Group who was Carillion’s senior independent director.

There were criticisms, too, of Alison Horner, Tesco’s head of personnel, over her role as chairwoman of Carillion’s executive pay committee. Senior executives Richard Howson, Richard Adam and Zafar Khan were all sharply criticised.

Mr Green, who is called “delusional” in the report, criticised the MPs’ inquiry. “The report fails to understand and accurately reflect the true, more complex picture of events,” he said.”

Source: The Times (pay wall)

Who audits the internal auditor’s external auditor?

“The auditor of wine retailer and supplier Conviviality could face questions over its role in the company’s collapse.

The Financial Reporting Council (FRC) confirmed to City A.M. that it was “looking closely at the reported accounting issues at Conviviality”.

“If the relevant threshold tests are met in relation to accountants at the company and/or its auditors a formal investigation may be opened,” a spokesperson said.

This follows two profit warnings from Conviviality last month which it said had stemmed from accounting errors.

The first was blamed on an arithmetical mistake, while the second related to an unpaid tax bill.

The company ceased trading on London’s junior market prior to the second announcement, and scrambled to form a rescue plan as its cashflow was hit.

After unsuccessful attempts to save the company with a fundraising backed by drinks giant AB InBev, the company appointed administrators early this month.

Its direct business Matthew Clark Bibendum was sold to Magners Cider owner C&C, while its retail arm which includes Bargain Booze and Wine Rack was sold to Bestway for £7.5m.

Chief executive Diana Hunter stepped down in the midst of the scandal, but she and other board members have faced criticism for a fast-paced acquisition-focused strategy.

The FRC has the power to fine auditors it finds to be substandard, though its powers are set to be reviewed by the government following concern that the bar for misconduct is set too high.”

http://www.cityam.com/284451/kpmg-could-face-questions-auditor-watchdog-after

Carillion auditors paid £40m to provide apparently “false reassurance to investors” says Parliamentary Committee

The auditors rely on calling Carillion’s dicey contracts “optimistic”!!!

“The £40 million that KPMG and Deloitte were paid as the external and internal auditors of Carillion respectively has been described as a “colossal waste of money” by MPs.

At a testy hearing of the work and pensions and business joint select committee, the reputations of audit partners at the two international accountancy firms were shredded as incredulous MPs wondered why they had not dug deeper when alarm bells seemed to be ringing around the construction contractor.

MPs heard evidence from Michelle Hinchliffe, head of audit at KPMG, Peter Meehan, the KPMG partner who audited Carillion, and Michael Jones, who led Deloitte’s internal audit service at the contractor. KPMG was paid £29 million over 19 years by Carillion, and Deloitte £11 million over an unknown period. Rachel Reeves, co-chairwoman of the committee, 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.”

Ms Reeves criticised Mr Meehan and Mr Jones after their respective admissions that Mr Meehan had failed to visit at-risk Carillion projects and Deloitte had missed quarterly meetings with the Carillion board’s audit committee.

“Carillion staff and investors could see the problems at the company but those responsible — auditors, regulators, and, ultimately, the directors — did nothing to stop Carillion being driven off a cliff,” she said.

Mr Meehan told MPs that for the 2014 and 2015 audits he had visited the construction project in Qatar that the former chief executive Richard Howson blamed for Carillion’s collapse. Mr Meehan did not make any subsequent visits despite knowing of the importance of the contract. Carillion claimed that it was left with £200 million of unpaid bills in Qatar. Mr Meehan repeatedly stated that despite Mr Howson’s assertions, the Qatar contract had only become a serious issue in the months after the 2016 accounts were signed off in March last year and leading up to the major profit warning of last July, which laid bare the crisis at Carillion. The auditor conceded that Qatar had been flagged as an “amber warning” at a meeting in the February before the sign-off of those accounts.

On another contract, the £350 million construction of the Royal Liverpool Hospital, Mr Meehan admitted that although he had been on previous fact-finding site visits, he had not returned despite internal revelations of major on-site issues in November 2016. He finally made a visit to the hospital last month, four days before Carillion went bust. He contested claims that Carillion’s accounting had become aggressive but said that he had told Carillion board directors that their accounting on some of the “riskier contracts” had become “optimistic”. His concerns were overruled. Despite this, he said he remained happy to sign off the accounts.

Mr Meehan said he had become aware of the enormity of the issues in Qatar in May last year, at which point “we knew a writedown was coming”.

That writedown and those on Royal Liverpool, the Midland Metropolitan in Birmingham and the £700 million Aberdeen bypass were taken on July 10, at which point Mr Howson was removed from his post. Mr Meehan said a review of contracts at that point found that in previous internal reviews, managers had been more pessimistic about the likely outcome for the contracts than the position that was reported.

The auditor said confusion was such in the Carillion boardroom that on the night before the July profit warning, directors were debating whether the writedown should be £695 million or £845 million.”

Source: The Times (pay wall)

Accountants accused of “feasting on Carillion carcass”

“MPs have accused the “big four” accountancy firms of “feasting on what was soon to become a carcass” as it emerged they banked £72m for work linked to collapsed government contractor Carillion in the years leading up to its financial failure.

Less than a fortnight before Carillion’s auditor KPMG is due to face questions from MPs on two select committees, the accountant and rivals Deloitte, EY and PricewaterhouseCoopers (PwC) submitted evidence to the inquiry.

Responses to questions from the committees revealed that the quartet of firms issued bills worth £71.6m over 10 years from 2008 for work for Carillion, its pension scheme and its government contracts.

Details of accountants’ fees emerged as more than 4,400 former Carillion staff working in prison maintenance, as well as catering and cleaning on military bases were told that they will keep their jobs.

The total number of jobs saved has now reached 6,668, more than a third of Carillion’s 19,500-strong workforce. But nearly 1,000 people have already been made redundant, while a further 11,800 staff still face an uncerttain conditions….”

https://www.theguardian.com/business/2018/feb/12/carillion-jobs-prison-defence-staff