Update on FRC investigations in relation to Carillion

News types: Investigations

Published: 16 May 2018

Given the clear public interest in this matter, the Financial Reporting Council (FRC) is providing an update on its investigation into Carillion. The main areas of focus for the investigations of KPMG’s audit of Carillion (2014 – 2017) and of two finance directors Richard Adam and Zafar Khan are: contract accounting; reverse factoring; pensions; goodwill and going concern. Good progress with the investigation is being made by the FRC’s team of lawyers and forensic accountants.

Key activities underway are:
  • Reviewing the audit files for the four year period as well as other material relevant to the financial statements and audits of Carillion, including accounting documents produced by the company and emails and other correspondence from the relevant period.  The FRC expects to review tens of thousands of documents and emails in order to establish how and why audit and accounting decisions were reached.
  • Collaborating with the OR (Insolvency Service), the FCA and the Pensions Regulator.  As liquidator of the Carillion companies, the OR has access to the bulk of the Carillion material and work is ongoing to ensure a lawful and efficient mechanism for sharing relevant material between the regulators.
  • The first of many detailed and recorded interviews and fact-finding meetings with those under investigation and other relevant witnesses have been conducted. Further interviews may be held as the responses of one interviewee often needs to be considered and analysed prior to conducting interviews of others.  It frequently takes several months to prepare, schedule and conduct a series of interviews.
FRC investigations are often complex and extensive and any findings may be challenged by experts, lawyers and, if applicable, Tribunal members.  This requires detailed and rigorous legal and evidential analysis. The FRC will complete the work relating to Carillion as quickly as possible.

The speed of the FRC’s investigations may also rely on the level of cooperation of those under investigation, audit clients and third parties (for example: other regulators and liquidators). The Carillion case is one of the largest the FRC has investigated.  The FRC will not cut corners to conclude its investigations as that may compromise the integrity of any enforcement action.

Notes to editors:

The Financial Reporting Council’s (FRC) 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.

The FRC confirms that no member of the Conduct Committee declared an interest in relation to this decision.

In relation to enforcement matters, 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.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
  • Investigation
  • 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 conducted by Executive Counsel and the Enforcement division.

In brief, the stages of the disciplinary process under the Accountancy Scheme are:
  • Decision to investigate
  • Investigation
  • 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.

Explore the topics