KPMG accepted the conclusions and record penalties levied against it by the U.K. Financial Reporting Council (FRC) on Thursday for the “exceptional” level of deficiencies found to have taken place during the Big Four audit firm’s work at collapsed construction company Carillion over a period of several years.

The FRC handed down fines totaling 21 million pounds (U.S. $25.7 million) across two separate decisions against KPMG regarding its Carillion failings. The first decision, related to the audits of Carillion’s financial statements for the fiscal years 2014-16 and additional work in 2017, included a penalty of £26.5 million (U.S. $32.4 million), discounted to more than £18.5 million (U.S. $22.6 million) for cooperation and admissions. The second decision, against affiliate KPMG Audit and related to certain transactions linked to Carillion’s 2013 financials, included a £3.5 million (U.S. $4.3 million) penalty, discounted to about £2.5 million (U.S. $3.1 million).

The FRC also required KPMG to pay more than £5.3 million (U.S. $6.5 million) in investigation costs related to both decisions.

In addition, the regulator fined two former KPMG audit partners—one as part of each decision—for their respective failings.

The details: Carillion went into compulsory liquidation in January 2018 and became one of Britain’s biggest insolvencies. Missed red flags by KPMG in its audit work at the company have been well-documented, including as part of a tribunal last year related to its misleading the FRC during the regulator’s investigation. The case resulted in a fine of £14.4 million (then-U.S. $17.4 million) against the firm in July 2022.

As part of the FRC’s actions Thursday, the first decision criticized KPMG’s unqualified opinions on the financials of Carillion from 2014-16. The regulator found the firm failed to:

  • Gather sufficient audit evidence for it to conclude the financials were true and fair;
  • Consider the implications of evidence suggesting Carillion’s accounting might have been incorrect or unreliable;
  • Conduct its work with an adequate degree of professional skepticism, including not subjecting Carillion’s management’s judgements and estimates to effective scrutiny; and
  • Ensure the audit engagement was properly managed and supervised.

“The breaches … all contributed to the outcome that this very large public company, which had multiple large contracts with public authorities, was not subject to rigorous, comprehensive, and reliable audits in the three years leading up to its demise,” the FRC said.

Peter Meehan, who led the audits, was fined a reduced £350,000 (U.S. $427,000).

In its second decision, the FRC faulted KPMG Audit for not obtaining sufficient evidence regarding certain business services transactions entered into by Carillion in 2013 that were recorded in the company’s financials in a way that increased its reported profits. Former KPMG Partner Darren Turner was fined a discounted £70,000 (U.S. $86,000).

Compliance considerations: The breaches in each decision were not found to be dishonest, but the FRC did note Meehan’s representations regarding the first decision lacked integrity.

The regulator reprimanded KPMG and required it to take remedial action to ensure such failings won’t be repeated.

“The number, range, and seriousness of the deficiencies in the audits of Carillion during the period leading up to its failure was exceptional and undermined … credibility and the public trust in audit,” stated FRC Executive Council Elizabeth Barrett. “This is reflected in the financial sanction imposed on KPMG.”

Firm response: KPMG UK Chief Executive Jon Holt called the FRC’s findings “damning” and said the firm accepted the regulator’s conclusions “without reservation.”

“It is clear to me that our audit work on Carillion was very bad, over an extended period,” said Holt in an emailed statement. “… Since this audit work was undertaken, we have done an enormous amount to improve controls and oversight across our firm.

“… As an auditor, I simply cannot defend the work that we did on Carillion. As the chief executive of KPMG, I am determined that we face up to this failure, and I am absolutely committed to continuing to work with my colleagues across the business to ensure that nothing like this can happen again.”