Update on FRC investigations in relation to Carillion
22 January 2019
In view of the significant public interest in this matter, the Financial Reporting Council (FRC) is providing a further update on its investigations in relation to Carillion. However, in order to protect the integrity of the investigations it would not be appropriate at this time to comment beyond the contents of the update below.
The FRC is investigating KPMG’s audits of Carillion (2014-2017) and the conduct of two former finance directors, Richard Adam and Zafar Khan.
Additionally, in November 2018, the FRC opened a further investigation relating to the provision of materials to the FRC by KPMG in connection with the FRC’s Audit Quality Review into aspects of the audit of Carillion for the year end 2016. The decision to open this investigation followed matters self reported by KPMG.
The FRC continues to progress its original investigations in relation to the collapse of Carillion in conjunction with other regulators. A key area of focus has been the financial performance of Carillion’s major contracts in both the construction and services divisions, and whether Carillion management and its auditors ensured that this was appropriately reported in its financial statements. The investigations are also considering conduct relating to pension liabilities, goodwill, cash disclosures and going concern.
The FRC has obtained and is analysing very significant quantities of documents relating to these areas. Detailed interviews have been conducted with audit team members and Carillion senior executives and further interviews are planned for early 2019.
The FRC meets regularly with case teams from other agencies to identify issues of common interest and ensure that relevant documents and information are shared to the extent permissible.
The matters being investigated by the FRC are complex and are expected to continue well into 2019. They are a critical stage in the process, the findings of which form the bedrock on which any regulatory proceedings are based. The FRC is committed to completing its investigations promptly and thoroughly.
The FRC launched its original investigations in January and March 2018 and provided an initial update on those investigations in May 2018.
Notes to editors:
1. The FRC’s mission is to promote transparency and integrity in business. The FRC sets the UK Corporate Governance and Stewardship Codes and UK standards for accounting and actuarial work; monitors and takes action to promote the quality of corporate reporting; and operates independent enforcement arrangements for accountants and actuaries. As the competent authority for audit in the UK the FRC sets auditing and ethical standards and monitors and enforces audit quality.
2. To meet its responsibility as the competent authority in respect of audit enforcement, the FRC operates the Audit Enforcement Procedure. This procedure applies to the investigation and sanctioning of breaches of the various requirements of the statutory auditors of Public Interest Entities (PIEs) and any other cases retained by the FRC including AIM companies with a market capitalisation in excess of €200m.
In brief, the stages of the Audit Enforcement Procedure are:
- Initial case examination and decision to investigate
- Decision by Executive Counsel as to whether to issue a Decision Notice (a notice with the findings and recommended sanction);
- Referral to Enforcement Committee and decision by the Enforcement Committee whether to issue a Decision Notice; and
- Referral to a Tribunal
In order for a matter to be referred for investigation by the FRC’s Executive Counsel under the Audit Enforcement Procedure, the FRC’s Conduct Committee is required to decide whether there is good reason to investigate an Allegation in relation to a Statutory Auditor and/or a Statutory Audit Firm.
Investigations are usually conducted by Executive Counsel and the Enforcement division. The FRC’s Conduct Committee may direct that the investigation is delegated to a Recognised Supervisory Body (RSB) which will provide an investigation report to the Executive Counsel so that (s)he may decide whether to issue a Decision Notice.
3. The FRC is the independent, investigative and disciplinary body for accountants and actuaries in the UK dealing with cases which raise important issues affecting the public interest. In brief, the stages of the disciplinary process under the Accountancy Scheme are:
- Decision to investigate
- Decision whether to bring enforcement proceedings against Member Firm or Member and, if so decided, referral to Disciplinary Tribunal
- Tribunal hearing
- Determination and imposition of sanction and/or costs orders
Under the Accountancy Scheme the FRC can start a disciplinary investigation in one of two ways: (i) the professional bodies can refer cases to the FRC; and (ii) the FRC may decide of its own accord to investigate a matter. The Conduct Committee will consider each case identified or referred to it and decide whether or not the criteria for an investigation are met.
The criteria are specified in paragraph 5(1) of the Accountancy Scheme. A Member or Member Firm shall be liable to investigation under this Scheme only where, in the opinion of the Conduct Committee the matter raises or appears to raise important issues affecting the public interest in the United Kingdom and there are reasonable grounds to suspect that there may have been Misconduct or it appears that the Member or Member Firm has failed to comply with any of his or its obligations under paragraphs 14(1) or 14(2) of the Scheme.
Investigations are conducted by Executive Counsel and the Enforcement division.
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