Carillion’s collapse and the accountancy oligopoly

John Barker exposes those that are effectively judge and jurors in their own malfeasance.

Earlier this year there were reports of a Financial Reporting Council (FRC) tribunal in which a partner of KPMG and layers of managers below him shifted blame for a forgery onto each other in the case of Carillion’s bankruptcy. Despite being ‘masters of the universe’, we got ‘Not-Me-Guv’ pleas. Forgery, manipulation of the key to a spreadsheet, generating retrospective spreadsheets and creating of false meetings were all elements in the auditing of Carillion aimed at the keeping the client happy. Carillion collapsed in 2018 with £7bn of debts despite being showered with public contracts. In May this year, KPMG as an entity was fined £14.4m as a consequence and given ‘a severe reprimand’. The individuals involved were also fined and their credentials removed.

KPMG is one of the ‘Gang of 4’ global scale auditor/consultants with fingers in pies big and small, private and public. It is a worldwide ‘partnership’ with all the tax advantages that brings. In the case of Carillion, all four have taken their slice. This oligopoly does not need price-fixing as ‘Everyone knows what everyone else’s rates are’. All four took in around £40bn last year with partners averaging £600,000. There are no serious rivals to undercut them despite what have been so far ineffectual political noises to open the business up to smaller entrants. They are rather, ‘too big to fail’, or rather the world they have created is too complex to do without them. Given too that auditing is a legal requirement in most countries, it’s in effect a state-backed oligopoly.

KPMG has form when it comes to crimes and misdemeanours. They’re not alone. PWC (Price Waterhouse Cooper), EY (Ernst & Young) and Deloitte’s are the other oligopolists, auditing all the top 100 companies in Britain, China and USA. They have form too. In the past they have been found out: PWC (Robert Maxwell, Barings Bank); Deloitte (Autonomia before its sale to Hewlett-Packard); and EY (Wirecard, NMC Health). Each time the outcome is the same: million pounds fines and no more is said.

In 2009 in Variant, I looked at these highly profitable intermediaries which showed the conflicts of interest at work as auditor and consultant and the cases against them as a consequence. These have continued in the years since including Carillion. The Variant article also attempted to show the full extent of the pies and where the four’s fingers were. They ranged from carbon markets we know to have little or no impact on global warming emissions to Academy schools and world health schemes that replaced state involvement. As auditors with access to senior managements, they were able to offer ‘bolt-on’ services like consultancy that became a bigger source of revenue than the auditing itself, and tax avoidance services. At the time, KPMG had the biggest client list in the UK and offices in 26 tax havens. As described by Sue Bonney, the relevant KPMG partner at the time: ‘Tax is a business cost to be managed like any other’ and ‘tax avoidance is legal’. More insidiously on the grounds that tax and tax schemes were too complicated to be properly understood by outsiders, personnel from KPMG and the rest were seconded to the HMRC tax authority on these grounds. Manifest conflict of interest that comes from these ‘revolving doors’ was to be found in the case of the 2013 Patent Box: a tax relief to encourage innovation and attract foreign capital and retrospective on anything containing an old patent. Who was the lead policy adviser? It was Jonathan Bridges, a KPMG corporate tax adviser. Once returned to KPMG, he then sold himself as ‘The Patent Box-what’s in it for you?’

In the USA, tax avoidance at least was not taken so lightly though it needed a 2003 whistleblower to reveal a set of illegal US tax shelter varieties (Blips, Flips, Opis and SOS) set up by KPMG. These shelters helped wealthy clients avoid paying $2.5bn. This is a criminal offence, and in 2005 the US member firm of KPMG International (KPMG LLP) was accused of fraud. In 2007, by paying a fine of $456m and agreeing to some minor conditions, the criminal charges were dropped. The instigators of the tax shelters were not, however, low-level employees who could be given the rotten apple treatment but senior partners. With the help of Judge Lewis Kaplan and the selective application of constitutional rights, KPMG was not convicted. The response of KPMG CEO, Timothy Flynn, echoes the narrative provided by every official wrongdoer in recent years, whether it be failed bank or criticized prison governor: ‘KPMG is a better and stronger firm today, having learned much from the experience’. Shameless because the wrongdoing was not motivated by any desire for improvement.

The government insider role has been even more insidious with the role of consultant. KPMG and PWC have been ‘beneficiaries of the state feeding of consultants’ as Prem Sikka described. He pointed to KPMG’s role as consultants to the Ministry of Defence for the development of the RAF’s air-to-air refueling fleet, the largest early PFI and one that ran for years. At the time KPMG had privatization mandates worldwide from the UK Ministry of Development (DFID) and for example as consultants to a World Bank-backed electricity privatization in Orissa in India, later described as a ‘fiasco’ by the investigating Kanungo Committee, as well as a host of advisory roles for electricity contracts in Africa.

At the same time, KPMG became advisors for reform of existing regulatory systems or the creation of new ones to regulate privatized services. This is when Bill Michael – recently resigned as KPMG UK chief after working-from-home-is-for-wimps remarks during the COVID lockdown – had declared regulation was no good he said because ‘complexity was here to stay’. KPMG’s 2007 Effectiveness of Operational Contracts on PFI Survey is full of self-praise and pre-empts any criticism with an elitist sneer: “We hope this survey will help to inform the debate – all too easily hijacked by politically motivated and emotive soundbites – about how to deliver the best value for money public services”. 

The business of privatizations, PFIs, PPPs and outsourcing and the conflicts of interest it brings when a company’s auditor is in a position as an advisor/consultant to recommend it for contracts brings us goes to the heart of the economic-political culture within which Carillion operated. There are distinct advantages especially in a financialized world for a company’s accounts to look good and strong: it is how to attract more money and puffs up the value of the share options its directors and mangers are paid with. Despite the strength of their oligopolistic position, it would seem these auditors do not like to annoy their clients and so accounts may look better than they are.

Looking at the history, the pattern repeats itself. In 2002, KPMG ‘settled’ charges with the US Securities and Exchange Commission (SEC) for ‘improper professional conduct’ as auditors for Gemstar-TV Guide International Inc, which had overstated its revenues by $250m. This settling meant neither admission nor denial, but in the wake of Enron’s collapse such not-proven deals were worth a lot to the oligopoly and have continued to do so. A year later in a case of ‘improperly booked revenues’ for Xerox, KPMG LLP’s CEO complained of a great injustice and fell back on complexity, how it was ‘At the very worst … a disagreement over complex professional judgments’. Nevertheless, when the dust had settled, KPMG paid out $80m in compensation three years later.

The falsification of revenues is one thing but the wishful thinking as to future revenues another when it becomes the kind of strategic wishful thinking auditors are supposed to be checking for. The subprime mortgage initiated financial crisis of 2008 brought all this home. Many years afterwards, KPMG got a ‘Not Guilty’ in the case of the HBOS bank collapse. Not so in the case of New Century, a collapsed US mortgage lender with an accusation from liquidators on the grounds that as the Financial Times said: “it allowed the lender to use inappropriate accounting that led it to underestimate the provisions it needed to cover bad loans. This made its position look better and gave it access to more funds”. Numerous examples were given by the court examiner to demonstrate KPMG’s lack of ‘due professional care’. While admitting nothing, a private agreement was made with the liquidators who had been looking for $1bn.

‘No-guilt’ fines have been frequent since, such as in 2019 in relation to Lloyd’s syndicate 218 and the Co-op Bank in terms of strategic wishful thinking and in conflicts of interest like the collapsed Dubai-based Abraaj private fund equity. In the UK, KPMG’s work with Rolls-Royce was investigated and recently has been fined in the case of the mis-named Conviviality and its collapse. In China, it has refused to co-operate with liquidators in the case the case of China Medical in which ‘KPMG’s letterhead was used on the audit report and they didn’t do the work’.

It went a step further with China Forestry whose liquidators claimed that during a pre-IPO (Initial Public Offering) audit, KPMG failed to detect executives had falsified the company’s assets and revenue by submitting forged bank statements and customer records and that KPMG staff had themselves had falsified papers. This time in July 2021, they paid out $84m. This ‘step further’ has an equivalent in the recent case of the selling of Silentnight to HIG when it was revealed that KPMG had agitated to put Silentnight, a client, into insolvency which allowed HIG, another client, to buy it up without the ‘burden’ of its £100m pension scheme. In most cases, we might say: ‘So what? Some investors with all their privileges have lost out’. But these were the pensions of low-waged workers just as at Carillion jobs were lost and elsewhere the PWC-audited Kabul bank collapse contributed to the Afghan government corruption message of the Taliban. Though it was pushed onto a ‘rotten apple’ partner and the fine in August last year, the FRC was pushed to talk of the ‘untruthful defence’ of the partner involved in the Silentnight scandal.

With pensions KPMG also has form. When Visteon was spun-off from Ford in 2000, workers were given contracts mirroring those of Ford car workers. This would mean that they would get 12-18 months’ wages as redundancy money. When Visteon in the UK was liquidated, KPMG as its administrators started from the position that the workers were not entitled to anything other than a cash payment equal to 16 weeks’ pay, whether you had worked there 15 years or not. Its argument: Visteon was a separate entity from Ford, and had been so since 2000.

In the case of Carillion, PWC appointed as administrator on the grounds of being the only one not to have had previous roles with the company and taking £20m for an initial two weeks work was alleged to have failed to supply axed Carillion workers with basic information, which they required to receive redundancy payments from the Insolvency Service and needed a reminder.

Back in 2015, Simon Collins, KPMG’s head told the Financial Times: “I would trade any advisory relationship to save us from doing a bad audit. Our life hangs by the thread of whether we do a good audit or not”. Until now that has manifestly not been the case. And, given what sounds like a self-designed version of reform and a history of rebukes, non-criminalised fines, the failure of a 2013 directive from the Competition Commission to crack open the oligopoly, and the likelihood of it throwing up barriers of complexity, we should be cautious about the prospects for significant change. But the flagship nature of Carillion – outsourced public works with its claims of superior efficiency involving hospitals and roads as well as worker livelihoods and pensions – and its collapse might just have this effect. This was soon followed by the collapse of the Ponzi-nature, Greensill, and its operation inside government and the subsequent investigation into PWC’s auditing of Wyeland Bank that was integral to the scheme.

But there is more. Rather more serious money maybe involved as the Official Receiver acting as liquidator of Carillion is looking for compensation to creditors from KPMG with the figure of £1bn in the air for its many failures such as allowing £200m of dividends to be paid even as the company was collapsing. In response, its spokesman said: “We believe this claim is without merit and we will robustly defend the case. Responsibility for the failure of Carillion lies solely with the company’s board and management, who set the strategy and ran the business”. At the same, appeals have been made to partners to chip in millions should the liquidator succeed.

The government would appear to have been shamed out of dropping proposed legislation from the Queen’s Speech in May that may impinge upon the oligopoly’s powers and privileges. Financial Times and Bloomberg reports say this caused outrage among vested interests. What is proposed is not high priority but allows for replacing the FRC with another an ARGA (Audit, Reporting and Governance Authority) that would ‘change the culture’. Until now the oligopoly has been told they must submit plans to separate their consultancy and auditing operations by 2024. Whether the proposed legislation would make any of this enforceable is questionable. For this, the ‘embarrassment’ of Carillion has to be the lever. What has not yet arisen are the necessary questions of the invited infiltration of government by oligopoly with their own self-interests, trading on expertise in the complexities they have gainfully contributed to making and tired claims of private sector efficiency.

John Barker is an independent socialist researcher whose work also goes into fiction and work with visual artist, Ines Doujak.