Around 28,500 pension scheme members are likely to face cuts to their retirement incomes due to the collapse of the firm. Pictured: Ex-chief executive Richard Howson
The accountancy watchdog will investigate accountancy firm KPMG over its audits of collapsed construction giant Carillion, it was revealed today.
The Wolverhampton-based building firm has been accused of trying to ‘wriggle out’ of higher pension payments while paying out tens of millions in dividends for shareholders and high pay packets for bosses.
Carillion went into compulsory liquidation on January 15 with debts of up to £5billion including a black hole in its pension fund of up to £2.6billion on some estimates.
Today, the Financial Reporting Council (FRC) said it will open an investigation under the Audit Enforcement Procedure following inquiries made since Carilion’s profit warning in July.
The probe will cover the years ended 2014, 2015 and 2016, and additional audit work carried out during 2017.
Business Secretary Greg Clark said: ‘I welcome today’s announcement from the Financial Reporting Council that following their initial enquires into the collapse of Carillion they will be opening an investigation into KPMG’s audit of the company’s financial statements.
‘I had written previously to the FRC asking them about this matter and trust their investigation will be conducted as quickly and thoroughly as possible.’
The investigation will be conducted by the FRC’s Enforcement Division and will consider whether the auditor has breached any relevant requirements, in particular the ‘ethical and technical standards’ for auditors.
KPMG’s 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 will all come under the FRC’s microscope.
Between 2011 and 2016, Carillion paid out £458.3m in dividends to shareholders
The FRC also pledged to conduct the investigation ‘as quickly and thoroughly as possible’.
‘The FRC is progressing with urgent inquiries 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.
‘The FRC is liaising closely with the Official Receiver, the Financial Conduct Authority, the Insolvency Service and The Pensions Regulator to ensure that there is a joined-up approach to the investigation of all matters arising from the collapse of Carillion,’ the FRC said.
But a KPMG spokesman said: ‘As we have already commented, we believe that we conducted our role as Carillion’s auditor appropriately and responsibly. Transparency and accountability are vital in building public trust in audit.
‘We believe it is important that regulators acting in the public interest review the audit work related to high-profile cases such as Carillion. We will co-operate fully with the FRC’s investigation.’
Around 28,500 pension scheme members are likely to face cuts to their retirement incomes due to the collapse of the firm.
The size of the deficit will also strain the pensions’ lifeboat, which will have to compensate the firm’s pension scheme members and is funded by a levy on other pension schemes.
Now scheme trustee Robin Ellison claims Carillion insisted it could not afford to pay more into the fund before it went bust, despite requests to do so.
Responding to questions from the Commons Work and Pensions Committee, Mr Ellison said: ‘Carillion made it clear, repeatedly, to the Trustee in valuation discussions that it considered it was constrained in agreeing higher contributions due to constraints in cash flow connected with its business model.’
Last week the Mail revealed how Carillion withheld £35.3m of payments to plug the deficit, due to be paid between August last year and this March, as a condition of emergency funding from the banks.
Bosses also considered or enacted measures lowering pay-outs to workers, to potentially save the pension scheme a further £200m.
In total during 2016 it paid £46.6m towards plugging the gap in its pension fund, on top of regular pension contributions.
Meanwhile, between 2011 and 2016, Carillion paid out £458.3m in dividends to shareholders.
Ex-chief executive Richard Howson, 49, who headed the company from 2012 until July 2017, pocketed an overall pay packet of £1.5m in 2016, including a £122,612 cash bonus.
Chair of the work and pensions committee Frank Field last night questioned why the Pensions Regulator, set up to make sure firms pay into their pension funds, had not stepped in.
He said: ‘It’s clear that Carillion has been trying to wriggle out of its obligations to its pensioners for the last 10 years.
‘The purported cash flow problems did of course not prevent them shelling out dividends and handsome pay packets for those at the top.
‘This culminated in negotiating deficit contributions away entirely last autumn to enable more borrowing.
‘Remarkably, this was endorsed by the trustees and the Pensions Regulator.’
Ellison’s letter also reveals that when Carillion went bankrupt, talks were underway to value the pensions’ deficit at around £990m, compared to the £587m in the company’s accounts. Worst-case scenario estimates put it at between £2bn and £2.6bn.
A spokesman for the Pension Regulator said: ‘The current regulatory framework attempts to balance the needs of a scheme and its members with the needs of an employer to invest in their ongoing business – this should be reflected in the length and structure of the recovery plan. TPR does not approve recovery plans – it is for the trustee and employer to agree them.
‘The content of Carillion’s recovery plans, and its payment of dividends, did not highlight sufficient concern to justify the use of our powers based on the group’s trading strength as presented at the time in their audited accounts.
‘However, it is clear from the company’s announcements since July that their underlying profitability was significantly weaker than market understanding or the position set out in prior year accounts.
‘It is too early to comment on whether with different information we could or would have taken action in the past or whether we will take action in the future, based on any new information that comes to light.’