The audit regulator was under pressure to instigate an investigation from the initial announcement of the collapse on 15 January 2018 and is due to appear before select committee tomorrow to face questioning about the failure of Carillion.

Unlike recent FRC probes into audit failures, the regulator has taken rapid action.

The FRC, which came under a barrage of criticism from MPs over the length of time it took to finalise its earlier inquiry into HBOS, said it ‘will conduct the investigation as quickly and thoroughly as possible’.

The regulator’s statement said: ‘The FRC is progressing with urgent enquiries into the conduct of professional accountants within Carillion in connection with the preparation of the financial statements and other financial reporting obligations under the accountancy scheme.’

The FRC investigation will be conducted by the regulator’s enforcement division, and will investigate whether the auditor has breached any relevant requirements, in particular the ethical and technical standards for auditors.

Several areas of KPMG’s work will be examined including the audit of the company’s use and disclosure of the going concern basis of accounting, estimates and recognition of revenue on significant contracts, and accounting for pensions.

The FRC also said it is liaising closely with the official receiver, the Financial Conduct Authority (FCA) , the Insolvency Service and The Pensions Regulator to ensure that there is a joined-up approach to the investigation of all matters arising from the collapse of Carillion. 

KPMG has been the external auditor to Carillion since the company was set up in 1999, and was paid £1.4m in audit fees last year, according to the 2016 annual report and accounts, as well as £400,000 for audit related fees and non-audit services. 

Deloitte LLP is the company’s internal auditor under an outsourcing arrangement.

Neither KPMG nor Deloitte highlighted underlying financial instability in the latest annual report.

In the 2016 annual report, released on 30 June 2017, the audit committee stated: ‘Given the nature of the group’s activities, revenue and margin recognition continues to be a key area of judgement for management.

‘A significant proportion of the committee’s time is spent reviewing contract judgements given the group’s extensive portfolio of contracts. The committee reviewed, through discussions with management and the external auditor, the positions and judgements taken by management on a number of material contracts across the group, including the impact on working capital performance.

‘The committee has also continued to monitor the overall management of cash flows and working capital, in particular receivables and payables, as these are key areas of importance in relation to the group’s financial performance.’

In the same annual report Carillion also issued a viability statement, which claimed that there were no foreseeable risks to the business, stating: ‘On the basis of both reasonably probable and more extreme downside scenarios, the directors believe that they have a reasonable expectation that the company will be able to continue in operation and meet its liabilities as they fall due over the three-year period of their assessment’. 

Carillion’s auditing is already subject to scrutiny from other regulators. At the beginning of the year, the company revealed it had been notified that the FCA ‘has commenced an investigation in connection with the timeliness and content of announcements made by Carillion between 7 December 2016 and 10 July 2017,’ and said it is ‘cooperating fully with the FCA.’

The FRC’s investigation has been announced the day before the regulator is due in front of a joint committee formed of the work and pensions select committee and the business, energy and industrial strategy select committee, which have announced an inquiry into Carillion’s collapse. The committees said they will be investigating how a company that was signed off by KPMG as a going concern in spring 2017 could go into liquidation with a reported £5bn of liabilities and just £29m left in cash less than a year later.

The first evidence session on 30 January will hear from the FRC with other witnesses coming from the Insolvency Service and the trustees of the Carillion pension scheme.

A KPMG spokesperson said: ‘We note the announcement of the FRC’s investigation into our audits of the financial statements of Carillion plc for the years ended 31 December 2014, 2015 and 2016, and additional audit work carried out during 2017.

‘As we have already commented, we believe that we conducted our role as Carillion’s auditor appropriately and responsibly.

‘Transparency and accountability are vital in building public trust in audit. We believe it is important that regulators acting in the public interest review the audit work related to high profile cases such as Carillion. We will co-operate fully with the FRC’s investigation.’

Who is Carillion?

Carillion was set up in 1999 and grew through acquisitions, including Mowlem, Alfred McApline, GT Rail Maintence, Citex Management Services, and the facilities management business of John Laing. In the 2016 annual report and accounts, it reported intangible amortisation of £13.8m (2015: £20m) related to the acquisitions of the Outland Group in 2015, Rokstad Corporation in 2014, John Laing Integrated Services Limited in 2013, Alfred McAlpine plc in 2008 and Mowlem plc in 2006.

In 2014, Carillion also mounted a failed bid to acquire rival Balfour Beatty.

Report by Pat Sweet, additional reporting Sara White