UK MPs investigating the collapse of Carillion gave Steve Haddrill, Financial Reporting Council (FRC) chief executive, a grilling over the regulator’s role in recent years.

In his evidence to the joint inquiry by the House of Commons’ Work and Pensions and Business, Energy and Industrial Strategy select committees Haddrill confirmed that the FRC had been monitoring the audit of Carillion since it issued its profit warning in July 2017. However, these inquiries were not made public at that time because of confidentiality requirements under company law. Haddrill said these now needed to be reviewed.

The evidence gained by the FRC since July was instrumental in its decision to launch its formal investigation into KPMG and its auditing of Carillion’s financial statements that was announced before Haddrill spoke to MPs. The investigation will cover the years 2014 -2016 and additional audit work carried out during 2017. The investigation will be conducted by the FRC’s Enforcement Division under its audit enforcement procedure.

The investigation will consider whether the auditor has breached any relevant requirements, in particular, the ethical and technical standards for auditors. Several areas of KPMG’s work will be examined including the audit of the company’s use and disclosure of the going concern basis of accounting, estimates and recognition of revenue on significant contracts, and accounting for pensions.

The regulator added that it is progressing with urgent enquiries into the conduct of professional accountants within Carillion in connection with the preparation of the financial statements and other financial reporting obligations under the Accountancy Scheme.

Haddrill was pressed by MPs on the timescales for the investigation. Conservative MP Antoinette Sandback a member of the BEIS committee noted that its inquiry into BHS auditor’s PricewaterhouseCoopers had been so far been running for 19 months and had still not reported. Hadrill said this investigation was near completion.

MPs also noted the length of time that KPMG had been an auditor at Carillion and that former finance directors had previously worked at the accounting firm. Manifest’s pre-AGM analysis for May 2017 noted that although KPMG had been the company’s auditor since 1999 there was no disclosure of any audit tendering plans.

Labour MP Peter Kyle, also a member of the BEIS committee, asked in the light of Carillion’s collapse, “What is the point of your organisation?”

Haddrill said that the FRC did not have the powers to look inside a company. Instead, its enforcement is based on retrospective reviews of company strategic reports and financial statements which must follow the requirements of international accounting standards. He told  MPs that it was shareholders that would enforce the corporate governance code and it was the responsibility of directors to run the company.

Sarah Albon, chief executive of The Insolvency Service also gave evidence to the inquiry. She said the insolvency process was going on in parallel with an investigation into the cause of the failure of Carillion. This would look into the treatment of dividends by the company, pension contributions and the remuneration of executives.

Last Updated: 30 January 2018