The latest news from the Carillion saga is that former auditors KPMG have come to a settlement with the Official Receiver in connection with a £1.3bn lawsuit brought against them in an attempt to find some money for the creditors after the collapse of the group in 2018.
Details of the settlement remain confidential but we can safely assume that whatever the actual figure is – it's a lot.
Well 'serve them right!' some might say but it is worth pointing out that KPMG's failure was not the worst feature of the whole debacle – but is they - or their insurers who are having to stump up the cash because no one else has any – at least not in the quantity required to even attempt to give the creditors something.
At the time of its collapse Carillion had racked up debts of some £7bn and some 3,000 people lost their jobs. It caused chaos for a multitude of public sector projects including the completion of two hospitals, roads, prisons and schools.
And who was responsible for this and for paying out millions in dividends just prior to the collapse – not KPMG? The responsibility for the collapse lies with the management. They made the decisions, they set the policy and they orchestrated one of the biggest UK corporate failures in decades.
KPMG's failure was in not telling everybody what was going on. The level of complacency within KPMG presumably was the root cause of why so many red flags were missed and clean audit reports signed when they should have been heavily qualified.
Investigations continue and this may not be the only penalty KPMG faces. The FRC are still investigating and presumably will report before the end of the decade. However there is an issue here.
It is one thing the regulator or the professional body fining auditors for incompetent auditing but it is entirely another for the liquidators to use the audit firm as a source of cash for the creditors.
The reason why liquidators do this is obvious. The audit firms are wealthy and insured. They have the money and are most likely anxious to put these failures behind them. Apparently KPMG were paid a total of £29m over 19 years for the audit. Whatever the settlement they have come to with the Official Receiver it is likely to be much more than this. Is this fair?
The question is why should an audit firm have to pay for the mistakes of others? Of course they should have sounded the alarm – their failure to do so is astonishing once the basic facts about what was going on in Carillion became known so they are partly responsible – but the originators of these misdeeds are the directors.
Will they be forced to sell the family silver to pay off the creditors? If the regulators find that the financial statements were falsified to the extent that they were fraudulent – e.g. designed to create a false position for Carillion to protect the share price and enable the payment of dividends – then the CEO and CFO and others may well be facing criminal charges but short of that it is likely that, financially at least, they will escape the clutches of the Official Receiver.
This whole affair simply reinforces the importance of independent auditing where the auditors act with integrity and with an enquiring mind so that those stakeholders in companies who are not privy to the realties but only what they are told can rely on the audit to protect them. Where auditors act in pursuit of profit and sacrifice their integrity in the process there disaster lies.
Cases like Carillion only devalue the profession. The regulator needs to act quickly and decisively to reassure the financial world that audits can be relied on and the major firms need to clean up their act and lead by example.
Maybe Carillion will be a turning point but it is doubtful. Enron and the demise of Arthur Anderson was supposed to be a turning point. Clearly it wasn't.
John Taylor is an author for accountingcpd. To see his courses, click here.
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