Downloading PDF. Please wait... Issue 2788

KPMG—auditor’s Carillion cover-up is part of ‘endemic’ problem

New hearings into KPMG reveal it knowingly hid the failings of collapsed company Carillion. Socialist Worker spoke to professor Stewart Smyth about the scandal
Issue 2788
A Carillion contractors sign to illustrate story about KPMG

Auditors should reveal the truth behind a company’s finances—KPMG did the opposite (Pic: Elliot Brown/Flickr)

When Carillion, the giant ­construction and facilities management company, crashed into bankruptcy four years ago it sent a shockwave through the British economy.

The firm that was building hospitals and schools for the government under Public-Private Partnership schemes had employed 40,000 people. And it was one of the ­highest valued companies on the London stock exchange.

But following its collapse many jobs were lost and half-finished ­buildings littered the landscape.

Now, shocking details of the way accounting firm KPMG staff deliberately falsified documents to give the ailing Carillion a financial clean bill of health have emerged.

KPMG, one of the biggest financial auditors, was supposed to ensure Carillion’s accounts were accurate and that it kept within financial laws.

Instead its staff forged ­spreadsheets, minutes of meetings and other vital documents to hide their own flawed practices.

Professor of accounting Stewart Smyth says Carillion was a disaster waiting to happen.

“Finance capital was given a free hand by the changing of accounting rules over a 30-year period,” he told Socialist Worker.

“This allowed Carillion to value its assets on the basis of expected future earnings, rather than what they were actually worth at the time.”

Having artificially inflated the value of their assets, Carillion bosses were able to take out ever bigger loans, said Smyth.

“There was an explosion of debt, and that enabled huge ­shareholder dividends,” he explained. “But there was going to be trouble if the expected returns on those assets didn’t materialise.”

That is exactly what happened. Carillion is shown to have made total profits of £669 million between 2012 and 2016—and it then paid out £371 million to shareholders.

But in reality, the firm only generated £166.4 million in cash from its normal operating activities. Smyth points out shareholders got more than twice the amount of cash the firm made.

And he says the “big four” ­accountancy firms, including KPMG, helped them do it. “The audits they conduct are supposed to show when a firm is taking too many risks,” Smyth said. “But in reality, they only tell you that the accountants expect the firm to survive for at least the next 12 months.

“The idea that KPMG’s failings at Carillion are the result of ‘rogue accountants’ is not sustainable. We are not talking about 1 or 2 percent of audits that fail, but more likely ­somewhere between 15 and 30 ­percent are flawed.”

Accountancy professor Prem Sikka recently noted that 39 percent of the audits delivered by KPMG were reported as deficient, and that its competitors recorded similar figures.

“The problem is endemic,” says Smyth. And it is built into the accountancy sector.

“Audits are used as a ‘loss leader’ for the big accountancy firms,” he explains. “They use them to get a foot in the door and then try to sell tax avoidance plans, management ­consultancies, outsourcing and so on.”

That creates a conflict of interest that means audits often miss chances to warn us when corporations are near to collapse. And, says Smyth, in all likelihood there will be more major unheralded bankruptcies in the future.


Reforms aren’t enough to fix the dangerous practices of auditors

As Financial Reporting Council (FRC) hearings into KPMG continue, the accountancy bosses have done their best to distance themselves from former colleagues.

They insist there is “no systemic problem”—despite the firm having been fined £27 million in Britain in the past three years alone.

Instead, they talk of individuals that tried to cover their own mistakes without the firm’s knowledge.

KPMG’s chief executive Jon Holt said it was clear that “misconduct has occurred and that our regulator was misled.”

“It is unacceptable, we do not tolerate or condone it in any way, and I am very sorry that it occurred in our firm,” he added. 

But the FRC has already announced separate investigations into KMPG’s auditing. It would do well to ask how Carillion managed so many “clean” audits—including in the year it went bust. 

The firm collapsed with a staggering £7 billion in liabilities—debts—and just £29 million in cash.

No wonder Carillion’s liquidators are preparing a £250 million negligence claim against KPMG.

“There’s no doubt that some heads will roll,” said Smyth. “But KPMG bosses and the regulator will try to tell us that this solves the problem—saying, ‘nothing more to see here’.

“But the establishment—including some politicians and sections of big business—recognise there is a danger in these practices. There are bills and acts of parliament that attempt to re-impose some regulation of the sector. There is even talk of ‘restructuring’ the big four accountancy firms—PwC, Deloitte, EY and KPMG.

“But this is all too little, and far too late. There needs to be a national audit service that is completely independent of the profit motive, and which has no connection to the firms it looks into.”

Unsurprisingly, no one in the accountancy industry is prepared to sign up to that.


The real price of the failure of Carillion

Carillion was Britain’s second largest construction firm and the largest supplier of services to the public sector.

The company oversaw hospitals, schools and prisons, and had part of the contract to build HS2.

Under governments from Tony Blair to Theresa May it profited by reaching long term deals set to suck in public money for generations to come.

The name of this money syphoning scheme became infamous—the Private Finance Initiative, better known as PFI. Construction firms were encouraged to bid to build big infrastructure, and then lease it back to the state for between 20 and 30 years.

PFI kept the debt off the government’s balance sheet. But this meant public funds would constantly stream into private hands in the form of mortgage-like payments.

These exaggerated costs were meant to be compensation for the “risk” the big firms were taking with their capital. After Carillion went under, our money was used to help pay its debts. The risk, it seemed, had been transferred back to us.

The bills for finishing the construction of half-built hospitals, including the £335 million Royal Liverpool University and the £350 million Midland Metropolitan, also landed on us.

The final tally on both ran to around £1 billion each.

 

 

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