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The Financial Reporting Council and KPMG Negotiating Record Fine for Carillion Audit Failings

KPMG is currently in advanced talks with regulators regarding a record fine worth tens of millions of pounds. The fine is in relation to the accountancy firm’s auditing of Carillion, a construction company that collapsed in 2018, resulting in significant job losses. The Financial Reporting Council (FRC) and KPMG are close to finalizing the discussions, with an announcement expected within the next few weeks.

Credits: Mark Kleinman, City editor – @MarkKleinmanSky

Date and Time: Saturday 23 September 2023 10:48, UK

KPMG and the FRC have reportedly been negotiating penalties between ┬ú25m and ┬ú30m, subject to a discount based on KPMG’s cooperation with the investigation. After the discount is applied, the total fine is anticipated to be approximately ┬ú20m. However, the figures are still liable to change, and it is possible that they could increase further.

The FRC is conducting two separate inquiries into KPMG’s work on Carillion. One inquiry covers the financial year 2013, and the other encompasses the subsequent four financial years. Should the negotiations and proposed fine be confirmed, it would mark the conclusion of the “big four” audit firm’s involvement in one of the UK’s most notorious corporate collapses in recent years.

Carillion’s insolvency led to widespread criticism of the conduct of its directors and advisors and fueled calls for comprehensive reforms within the audit profession. However, many of these proposed reforms have yet to be implemented by the government. KPMG has already faced a substantial ┬ú14.4m fine last year for its role in the Carillion scandal, as well as several other fines for audit failings in the past five years.

The specific details and scope of sanctions that will be imposed by the FRC on former KPMG partners involved in the Carillion audit remain unclear. Last year, KPMG and the Official Receiver reached a settlement on behalf of Carillion’s creditors, amounting to ┬ú1.3bn, regarding allegations of negligence on the part of the audit firm. The terms of the settlement were not disclosed.

Additionally, the fallout from Carillion’s collapse has resulted in bans for former board members. One such case involves Zafar Khan, the group finance director, who received an 11-year boardroom ban. legal proceedings against other former executives, including former CEO Richard Howson, are ongoing. In total, eight former Carillion directors are facing bans following legal proceedings authorized by the then business secretary Kwasi Kwarteng in January 2021.

Carillion, responsible for numerous construction and service contracts across the UK, went bankrupt, leaving debts of nearly ┬ú7bn. The company employed over 43,000 people, including 18,000 in the UK. A parliamentary business select committee report criticized Carillion’s corporate governance and highlighted the company’s mismanagement and accounting practices.

KPMG served as Carillion’s auditor for almost twenty years, earning a total of ┬ú29m for its audit work. Notably, the government is reportedly planning to exclude audit reform legislation from the King’s Speech in November. Instead, a new statutory regulator called the Audit, Reporting, and Governance Authority (ARGA) would replace the FRC.

KPMG and the FRC both declined to comment on the ongoing negotiations and potential fine.

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