Auditor under the cosh
KPMG is becoming the firm of auditors with nine lives. Having escaped virtually unscathed from its audit of HBOS, before it hit the skids, and been given a whack across the wrists for its audit of the Co-op Bank, it now emerges as the auditor of Carillion. This is in addition to its other disgraced clients including Fifa.
The firm will doubtless claim that it was responsible for the financial review at the contractor Carillion which uncovered the £845m of spoiled contracts. Maybe. But where was its words of warning on contracts, the build-up of debt and the future viability of the company before then?
Didn’t it feel compelled to alert the audit committee that a more realistic picture of the future should have been sketched out to the stock market and more attention paid to ballooning bank debts and the Pension Protection Fund?
To the credit of the Financial Reporting Council, the audit and governance watchdog, it was quick off the mark to say that it was monitoring the Carillion collapse with other regulators and preparing to investigate the audit of the group and the relevant accounting professionals at the company. That is all fine and dandy, except no one can have great faith in the independence of the FRC when there are at least three former KPMG associates in senior positions.
Stella Fearnley, a former FRC member and now a professor at Bournemouth University, described the FRC’s decision to clear KPMG over the HBOS audit as ‘complete tripe’.
No one seriously wants to see KPMG suffer the same fate as Arthur Andersen. As the auditors at the centre of the Worldcom, Enron and DeLorean scandals at the turn of the century, it was put out of business and the big five became the big four – KPMG, PwC, EY and Deloitte. All have had problems and PwC was given a red card in India last week. But it is KPMG’s failings that are damaging the image of the professions. How much confidence can investors in public companies have in an audit report signed off by the firm?
Until the FRC holds KPMG to full account and properly punishes those responsible for failed audits, faith in the quality of its work will drain away.
Leniency does no one any favours.
Green stuff
ONE imagines Sir Philip Green, former proprietor of BHS, is keeping a watchful eye on the crisis at Carillion where his namesake Philip Green is in the chair.
It was easy for the Pensions Regulator to target Sir Philip for failing to look after the BHS pension fund, before selling the company, because it had been privately owned.
Green stumped up £363m of his own money ensuring lower income pensioners received at least as good a deal as in the Pensions Protection Fund (PPF) and better paid executives received a much better deal than they would in the PPF.
There is no such backstop at Carillion where the pension fund deficit is a estimated £900m. Yet the behaviour of the other Green and directors was unfortunate, paying big dividends for the 16 years prior to collapse, including £78m in 2016. A more responsible approach would have been to make sure that securing the retirement of Carillion’s 28,000 pensioners was more important than keeping the company’s shareholders happy. In the event, investors showed no gratitude and brought the business to its knees.
Fortunately, the PPF provides a backstop as it was meant to do. But the distress for future retirees who will see prospective incomes cut by 10pc, and those further up the chain who will see pensions capped at £38,505, should not be underestimated.
Nor can it be happy news for healthy schemes that hold up the whole edifice by paying into the PPF.
Carillion directors should be forced to disgorge some of their wealth.
It might be a long wait.
Saving GKN
MIKE Turner at GKN faces a tough time holding off the predators following Melrose’s opening £7bn bid for one of Britain’s top engineers.
The best defence may be to rapidly sell the aerospace business and focus all management efforts on improving returns on car parts. A Melrose buyout funded by debt and paper at this late stage of the bull market, with interest rates on the rise, would be imprudent and value destructive.