The Financial Reporting Council (FRC) has announced it will be investigating KPMG over its audit of Carillion. Whilst it's clearly regrettable that this is necessary, ICAEW wholeheartedly supports this step, and we commend the urgency with which the FRC is acting.
It is absolutely vital that investors and shareholders, employees, pensioners and the wider public are able to have confidence in audit and financial statements. Cases such as this undermine that trust, so it is right and proper they should be investigated - and swiftly. Where there are lessons to be learned, we need to know as soon as possible - so we can act on them.
However, the collapse of Carillion has highlighted once again a gap in accountability when it comes to investigating the role of boards in such high-profile corporate failures. Four agencies – the FRC, the Insolvency Service, the Pensions Regulator and the Financial Conduct Authority – are all looking at various aspects of Carillion’s collapse and who should be held accountable. As the law stands, any director of a company that goes into liquidation can be disqualified, but the FRC is empowered to go further in some situations and under certain conditions. What is needed is a simpler system where all directors are subject to the same regime, and where one agency can hold all directors equally to account.
The current system is at odds with the principle of collective responsibility for boards enshrined in legislation and policy.
Outsourcing the Public Interest?
We should not overlook the wider commercial and strategic dimensions of the Carillion episode. It is right that the Government should drive a hard bargain on behalf of taxpayers when it contracts with large suppliers, but a succession of high profile failures over the last few years leaves us all wondering if the business model for public sector outsourcing is working as it should.
Carillion is only the latest major contractor to be caught out by a toxic combination of high risk and low margins. When margins are too thin, there is no buffer to absorb problems that do occur. Bidding costs for outsourcing deals also tend to be very high. These factors can often mean not just risk, but a lot of financial stress being borne by businesses.
Driving short term value for money is laudable, but it should not be at the expense of a sustainable and efficient outsourcing sector. Government must take care to protect the safety and integrity of the market that provides its services.
Of course, the collapse of Carillion has a wider impact beyond its customers and employees. Many thousands of suppliers will be impacted too. To ensure they have access to the help they may need, we have set up an online portal, containing links to advice and support. This can be accessed at http://www.icaew.com/carillion.
Is it not time that the farce of the so called independent audit is brought to an end? There can be no such thing if the company choses its auditor and pays their fees. How many more cases like this need to come into the public domain before remedial action is needed.