--- title: "KPMG and Carillion: the audit relationship and its aftermath" language: en canonical: https://dossiertwist.com/dossiers/carillion-plc/relationships/kpmg-carillion/ as_of: 2026-10-22 keywords: ["Carillion plc","Carillion","compulsory liquidation","Official Receiver","special managers","KPMG","Financial Reporting Council","Financial Conduct Authority","Insolvency Service","director disqualification","Richard Howson","Richard Adam","Zafar Khan","Philip Green","early payment facility","pension deficit","Pension Protection Fund","Royal Liverpool University Hospital","Midland Metropolitan Hospital","Tarmac demerger"] --- # KPMG and Carillion: the audit relationship and its aftermath **Question.** How did KPMG serve as Carillion's auditor, and what followed from its audits? **Answer.** KPMG audited Carillion for all 19 years of the company's existence, with KPMG LLP holding the appointment from 13 May 2014; the House of Commons committees put its audit fees over that time at £29 million and recorded that it never qualified its opinion. The committees concluded that KPMG was 'complicit' in Carillion's aggressive accounting judgements; KPMG replied that it disagreed with their characterisation of its audit work as 'complacent'. The Financial Reporting Council sanctioned KPMG LLP in 2022 over false information given to its inspectors and in 2023 over serious breaches in the 2014–2016 audits, and a £1.3 billion negligence claim brought by Carillion's liquidator was reported in February 2023 to have been settled on confidential terms. ## Appointment, audit partners and fees - Analysis: KPMG was appointed as Carillion plc's auditor at the company's inception in 1999, according to Carillion's audit committee reports, and the House of Commons committees' joint report states that it audited Carillion for all 19 years of its existence. The appointment moved between two KPMG entities in 2014. Carillion's 2014 audit committee report states that KPMG Audit Plc resigned as auditor on 13 March 2014 under section 516 of the Companies Act 2006 and that on 13 May 2014 the directors appointed KPMG LLP as auditor to fill the casual vacancy under section 485(3); the 2014 accounts attribute auditors' remuneration for 2013 solely to KPMG Audit Plc and for 2014 solely to KPMG LLP. Over the whole period, the committees state, KPMG charged £29 million in audit fees, alongside charges for taxation and other assurance services, and the financial statements show that KPMG never offered a qualified audit opinion. [src-003] [src-039] [src-094] - Analysis: Following publication of the 2013 results, Peter Meehan succeeded Darren Turner as KPMG's Group Audit Partner for Carillion, Turner attending the May 2014 annual general meeting before relinquishing his responsibilities, according to Carillion's 2014 audit committee report; the 2016 report names Meehan as Group Audit Partner, attending each audit committee meeting in 2016. The FRC describes Turner, a former partner of KPMG LLP, as Audit Engagement Partner for the 2013 financial year, audited by KPMG Audit Plc, and Meehan, also a former KPMG LLP partner, as Audit Engagement Partner for the 2014, 2015 and 2016 audits and the additional audit work in 2017. Carillion planned to change auditor. Its 2014 audit committee report stated that the group would tender its audit by the year ending 31 December 2019 and rotate to a new audit firm by the year ending 31 December 2023; the 2016 report said that, in view of regulatory changes and the change of Group Finance Director from 1 January 2017, the timing of a tender would be kept under annual review, and that the company would not renew or enter into an audit engagement with KPMG for the financial year beginning 1 January 2024. Andrew Dougal, the audit committee chair, wrote that no tender was held in 2017 mainly because a new Finance Director had very recently been appointed, and that in late 2017 he concluded that a retender should be held in 2018 and was agreeing this with Justin Read, who was replacing him as audit committee chair, when the company went into liquidation. [src-094] [src-003] [src-037] [src-081] - Analysis: Andrew Dougal's letter of 5 April 2018, citing KPMG's letter to the committees of 2 February 2018, lists KPMG's statutory audit fees for Carillion as £1.8 million in 2008, £1.3 million in 2009, £1.5 million in 2010, £1.4 million in 2011, £1.5 million in 2012 and 2013, £1.3 million in 2014 and £1.4 million in 2015 and 2016, an average of £1.46 million; Dougal wrote that, although he could not say for certain, the acquisition of Alfred McAlpine completed in 2008 was likely a significant part of the higher fee that year. Carillion's audit committee reports give KPMG's total fees as £1.7m for 2013 (audit £1.5m or 88%, non-audit £0.2m or 12%; paid to KPMG Audit Plc), £1.6m for 2014 (audit £1.3m or 81%, non-audit £0.3m or 19%), £1.8m for 2015 (audit £1.4m or 78%, non-audit £0.4m or 22%) and £1.6m for 2016 (audit £1.4m or 88%, non-audit £0.2m or 12%). The non-audit services in 2014 related to tax advisory and compliance work towards regulatory reports for a potential transaction, and in 2016 to tax advisory and other assurance services. [src-081] [src-094] [src-003] ## Audit opinions and the 2017 contract review - Analysis: KPMG LLP's audit reports on Carillion's 2014 and 2016 financial statements, both signed by Peter Meehan as senior statutory auditor, stated that the opinions were unmodified. The 2014 report, signed on 4 March 2015, identified as the risks of material misstatement with the greatest effect on the audit the recognition of contract revenue, margin and related receivables and liabilities (total revenue £3,493.9 million) and the carrying value of goodwill (£1,519.1 million). It set materiality at £9.0 million, 5.9 per cent of normalised group profit before tax, subjected five of the group's ten reporting components to audits for group reporting purposes and three to specified risk-focused procedures, and noted that the timing of revenue recognition from licence arrangements, which KPMG's report on 2013 had included among the risks with the greatest effect on the audit, was considered less significant in 2014. The 2016 report, signed on 1 March 2017, stated that the financial statements gave a true and fair view of the group's and parent company's affairs at 31 December 2016 and of the group's profit for the year. It set group materiality at £8.0 million (2015: £8.0 million), 5.4 per cent of normalised group profit before tax of £147.8 million; named contract revenue and margin recognition, a new 'other revenue judgements' risk on £20.0 million of licence income, and the carrying value of goodwill (£1,571.0 million) as the risks with the greatest effect on the audit; and stated that KPMG had nothing material to add or draw attention to regarding the directors' viability statement or the disclosures on the use of the going concern basis. [src-094] [src-003] - Analysis: KPMG's audit team also worked on Carillion's 2017 Enhanced Contract Review. According to Andrew Dougal's letter of 5 April 2018, the team reviewed 58 contracts, representing 73% of total group receivables, on an accelerated basis, and KPMG major contract specialists gave the 11 most significant and complex 'enhanced' testing. The committees' question to Dougal cited KPMG's note that it had challenged management to consider whether the results evidenced a prior period error. Dougal answered that management concluded the changes related to subsequent events, namely the decision to withdraw from construction in Canada, Qatar and Saudi Arabia and challenges on certain UK contracts that crystallised after the 2016 annual report; that KPMG's report to the audit committee of 9 July 2017 agreed with management's assessment; and that the committee, having questioned the position at length, was satisfied. Carillion's interim results of 29 September 2017 accordingly treated the contract provisions of £1,045.5m as changes in estimate under IAS 8, with no restatement of comparative amounts. In October 2023 the Insolvency Service stated that the 2015 and 2016 financial statements were misstated in respect of the major contracts by £95.4m and £179.2m respectively, and the FRC found serious breaches in KPMG's audit work on Carillion's contracts in 2014–2016. [src-081] [src-095] [src-042] [src-037] ## The committees' criticism and KPMG's reply - Analysis: The House of Commons committees concluded that KPMG, having audited Carillion for 19 years and been paid £29 million, never qualified its audit opinion, 'instead signing off the figures put in front of them by the company's directors', and that 'in failing to exercise—and voice—professional scepticism towards Carillion's aggressive accounting judgements, KPMG was complicit in them'. They noted that KPMG's 2016 report described contract revenue risks only in general terms, whereas its February 2017 presentation to the audit committee had described the traded position on contracts as 'challenging' though 'reasonable' when considered with the provisions. These are conclusions of a parliamentary select committee report, made while KPMG's audits were under FRC investigation. KPMG replied that its 2014–2016 audit work and its 2017 work were the subject of the FRC's ongoing investigation, that it 'respectfully' disagreed with the committees' characterisation of its audit work as 'complacent', which did not reflect the hard work and commitment of the Carillion audit team, and that a company failing after an unqualified audit opinion 'does not automatically mean the auditor did a bad job'; KPMG's head of audit had told the committees she did not believe 19 years was 'too long to be impartial'. In October 2023 the FRC's settlement decision found serious breaches of relevant requirements in KPMG's 2014–2016 audits and imposed on KPMG LLP a financial sanction of £18,550,000 after a 30% discount. [src-107] [src-039] [src-037] ## FRC sanctions against KPMG LLP - Analysis: The first FRC case concerned information KPMG gave the regulator rather than the conduct of the audits. On 25 July 2022 the FRC announced sanctions against KPMG LLP, a former KPMG partner and four former KPMG employees after an independent Disciplinary Tribunal, following a five-week hearing in January and February 2022, made findings of misconduct concerning the provision of false and misleading information and documents to the FRC's Audit Quality Review inspectors in connection with KPMG's audits of Regenersis plc (period ended 30 June 2014) and Carillion plc (period ended 31 December 2016). KPMG admitted liability for the acts of all the individuals and that those acts amounted to misconduct. It was fined £20 million, reduced to £14.4 million to reflect self-reporting, co-operation and admissions, severely reprimanded and ordered to appoint an independent reviewer of its AQR policies and procedures, and it agreed to pay £3.95 million towards Executive Counsel's costs of the investigation, together with the costs of the Tribunal. The proceedings ran under the FRC's Accountancy Scheme; the Formal Complaint did not allege misconduct in the performance of the audits, nor that the financial statements had not been properly prepared, and the Tribunal's report was not published at the time. A national newspaper later described the outcome as a settlement, whereas the FRC describes Tribunal findings after a hearing, with sanctions determined at a further hearing in May 2022. [src-084] - Analysis: The second case concerned the audits themselves. On 12 October 2023 the FRC announced that its Executive Counsel had issued two Final Settlement Decision Notices under the Audit Enforcement Procedure, concluding her investigations into the audits of Carillion. The FRC's summary of findings for the first decision states that KPMG gave unqualified opinions on Carillion's 2014, 2015 and 2016 financial statements, the 2016 opinion being dated 1 March 2017, and that Carillion was 'not subject to rigorous, comprehensive, and reliable audits in the three years leading up to its demise'. It found that in 2016 the work of KPMG and Mr Meehan on going concern and Carillion's financial position was 'seriously deficient', failing to respond to numerous indicators that core operations were loss-making and reliant on short-term and unsustainable measures to support cash flows; that breaches concerned the most significant UK and overseas construction and services contracts, reported debt and going concern including the use of a supply chain finance facility, 2016 pension liabilities and goodwill impairment testing; and that KPMG failed to gather sufficient appropriate audit evidence and to apply adequate professional scepticism to management's judgements and estimates. The FRC stated that these breaches were not dishonest and in the majority of cases not intentional, deliberate or reckless. Under that decision KPMG LLP received a financial sanction of £26,500,000, reduced by 30% to £18,550,000 to reflect the firm's co-operation and admissions, which the Executive Counsel described as the highest ever imposed by the FRC; a severe reprimand; a declaration that the relevant audit reports signed on its behalf did not satisfy the Relevant Requirements; and an order to take remedial action, including evaluating and reporting whether the measures it had taken since 2017 were sufficient. KPMG LLP also pays Executive Counsel's costs of both investigations, £5,324,365.68. Mr Meehan was fined £500,000, reduced to £350,000, severely reprimanded and excluded from ICAEW membership for 10 years. The findings are summarised by the Executive Counsel from settlement decisions that reflect the respondents' co-operation and admissions and were not published when the outcome was announced. KPMG's recorded reply predates the findings: in 2018 it told the committees that it respectfully disagreed with their characterisation of its audit work as 'complacent'. No later public response by KPMG or Mr Meehan to the 2023 findings was found in the retained documents. [src-037] [src-107] ## Carillion's claim against KPMG - Analysis: After the collapse Carillion, in liquidation, prepared a claim against its former auditor. The High Court's 2020 judgment records that on 1 October 2019 Carillion's solicitors wrote to KPMG's solicitors referring to write-downs in June and September 2017 of £845 million on certain contracts, a further £200 million on support services contracts and a £134 million goodwill impairment, and that a standstill agreement had earlier been concluded while KPMG's work was investigated by the office-holders. Carillion then applied under CPR 31.16 for pre-action disclosure of KPMG's electronic audit files, intending to claim that KPMG, as auditor of Carillion and many subsidiaries, failed to detect that the financial statements did not reflect the true position on construction contract revenue and goodwill. The application concerned the audits for 2014 to 2016 and, for contract accounting, 9 of the 58 contracts reviewed by Carillion's management between May and July 2017 (write-downs were made on at least 45): the Aberdeen Western Peripheral Route, Royal Liverpool Hospital, Battersea Power Station, Midland Metropolitan Hospital, Southmead, TTC Vaughan and Union Station in Canada, and Msheireb and Al Dara in the Middle East. In Carillion Plc (in liquidation) v KPMG LLP and KPMG Audit Plc [2020] EWHC 1416 (Comm), judgment of 3 June 2020, Mr Justice Jacobs dismissed the application, considering that after KPMG's letter of response Carillion should plead its case in the usual way. [src-070] [src-108] - Analysis: According to the Pensions Regulator's regulatory intervention report, the Official Receiver, acting as liquidator of the Carillion group, issued High Court proceedings against KPMG in January 2022 claiming damages of £1.3 billion for alleged negligent audits of Carillion plc's financial statements. A national newspaper reported on 17 February 2023 that KPMG had settled the claim, which concerned audits of Carillion's accounts for 2014 to 2016; neither KPMG nor the Official Receiver would confirm the amount, and a spokesperson for the liquidator said the parties had agreed that the terms would remain confidential. The report states that the creditors include HMRC and that the claimants alleged Carillion paid £210m in dividends in reliance on KPMG's audits. The negligence allegation was not adjudicated, and no admission of liability is reported. KPMG's UK chief executive said in a statement, as the newspaper reported, that he was pleased the claim had been resolved, that Carillion was an extreme and serious corporate failure and that it was important that all learn the lessons from its collapse. [src-036] [src-076] ## Sources - [src-003] Company statement source · src-003 - [src-039] Carillion: Second Joint Report of the Business, Energy and Industrial Strategy and Work and Pensions Committees (HC 769), chapter on external checks and balances, House of Commons Business, Energy and Industrial Strategy and Work and Pensions Committees, 2018-05 - [src-094] Company statement source · src-094 - [src-037] Sanctions against KPMG LLP, KPMG Audit Plc and two former partners (Carillion audits), Financial Reporting Council, 2023-10-12 - [src-081] Letter from Andrew Dougal to the committee chairs, 5 April 2018, House of Commons Business, Energy and Industrial Strategy and Work and Pensions Committees (written evidence published by the committees), 2018-04-05 - [src-095] Regulatory record source · src-095 - [src-042] Company statement source · src-042 - [src-107] Carillion: Responses from Interested Parties to the committees' report (HC 1392, Second Special Report), House of Commons Business, Energy and Industrial Strategy and Work and Pensions Committees, 2018-07-12 - [src-084] Sanctions against KPMG and others in connection with the Regenersis and Carillion audits, Financial Reporting Council, 2022-07-25 - [src-070] Carillion plc (in liquidation) v KPMG LLP and KPMG Audit plc [2020] EWHC 1416 (Comm), judgment, High Court of Justice, Commercial Court (The National Archives, Find Case Law), 2020-06-03 - [src-108] Companies House company record: KPMG Audit Limited (03110745), Companies House - [src-036] Carillion group: regulatory intervention report, The Pensions Regulator - [src-076] Media source · src-076