“It’s Not only Carillion that’s Built on Sand, it’s our Whole System of Corporate Accountability”

The construction & services giant collapsed even as KPMG signed off on its financial statements; now they deny any responsibility.

By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.

The Big Four accountancy firms — PricewaterhouseCoopers, Ernst & Young, KPMG, and Deloitte — reported combined annual revenues of $134 billion in 2017. In the global audit arena, they are virtually unassailable. In the US, the Big Four audit 497 of the S&P 500 companies. In the UK, they audit 99 of the FTSE 100 companies. In Spain there’s not a single firm listed on the IBEX 35 whose accounts are not audited by one of the Big Four.

But what are the Big Four firms actually good for?

Given the oligopolistic structure of the global audit industry as well as the potential conflicts of interest that can arise between the auditors’ myriad roles, this is a vital question — and one that is finally being asked by British lawmakers following the epic crash-and-burn of the services and construction giant Carillion.

In recent years, the external and internal auditors of Carillion, KPMG and Deloitte, pocketed a combined £40 million for their services. Yet they abjectly failed to discover, and warn investors of, the company’s precarious condition that caused it to collapse in spectacular fashion in January. Many other market players, including major investors, pension covenant assessors, and hedge funds shorting Carillion stocks on the markets — some with access to the accounts, others without — saw warning signs long before its demise. So, why didn’t the auditors make sure that the company discloses those problem to investors?

Carillion’s external auditor, Dutch-seated KPMG, signed off on its accounts without fail to the very bitter end, even though it was clear that Carillion had wafer-thin profit margins and was dangerously overloaded with debt, including some £2.6 billion worth of pension liabilities, and that between 2012 and 2016 it ran up debts and sold assets just to continue paying out dividends to shareholders.

Yet, in Carillion’s last ever annual report, KPMG approved Carillion’s viability statement, certifying it as strong enough to survive for “at least three more years.” It didn’t even last three months.

Even now, the auditor refuses to acknowledge any responsibility. “Clearly with what happened, things are very sad,” said Peter Meehan, the KPMG audit partner who handled the firm, in response to grilling by the UK’s Work and Pensions Select Committees last week. “I have pondered long and hard over this. I think me and my team all did the best we could and I stand by the decision we gave on the 31 December 16 accounts.”

This version of events clashes wildly with another provided last week by a former Carillion executive who claims that big financial problems were readily apparent by mid-2016. But instead of coming clean, the firm’s management, seemingly with the help of its auditors, chose to “placate the City” by failing to disclose the problems. “Anyone in the business knew there were major problems, even middle managers,” the former Carillion executive told The Guardian.

If middle managers knew, then it’s safe to assume that the auditors did too, but the chances of them being held to account are thin. The problem, according to Prem Sikka, a professor of accounting, is that the Big Four, the self-anointed guardians of fiduciary responsibility and probity at the world’s biggest companies and banks, “owe a ‘duty of care’ to the company and not to any individual employee, creditor, pension scheme member, saver or shareholder”:

[R]ather than serving the public interest, they prioritize the interests of their own members. Despite corporate scandals involving all of the Big Four accounting firms (Deloitte, PwC, EY and KPMG), none has been broken up, and hardly any firms are shut down or barred from securing new business.

It wasn’t just the auditors that were asleep at the wheel; so, too, was The Pensions Regulator (TPR), which sat idly by as Carillion steadfastly refused to pour enough funds into its 13 final salary pension plans. Documents published by the committee show the plans’ trustees requested TPR to intervene in 2010 and again in 2013, having repeatedly failed to secure the level of contributions they believed were necessary, or to agree a deficit recovery plan, but to no avail.

The trustees also suspected that Carillion’s finance director at the time, Richard Adam, viewed the pension payments as a “waste of money,” as minutes from a meeting between trustees and the regulator in 2013 show. Directors much preferred to pay out “mega dividends” to shareholders, said Frank Field, a veteran Labour MP and head of the the Work and Pensions Select Committees. “They were shoveling money out to themselves, they were shoveling it to shareholders, why didn’t you [the pension regulators] get them to shovel it to pensioners?” he asked.

In a classic example of closing the barn door after the horse has bolted, TPR launched an “anti-avoidance” inquiry three days after Carillion went bust — or as Field put it: “started its arduous process of chasing money down from Carillion a few days after it was formally announced there was no money left.”

Although the UK’s pensions “lifeboat” – the Pension Protection Fund (PPF) – is supposed to be financially strong enough to absorb Carillion’s pension plans “with relative ease,” pension payouts are still likely to be cut by up to 15% due to the company’s failure. As financial regulators and auditors continue to fail spectacularly at their jobs, corporate collapses like Carillion are likely to occur with increasing frequency, Frank Field eloquently warned:

“We imagined that regulators regulate, and auditors audit. I suppose the employees, suppliers and pensioners of Carillion, and the public, did likewise. We were told this morning, however, that these highly paid individuals are mere spectators – commentators at best, certainly not referees — at the mercy of reckless and self-interested directors.

“I fear it is not only Carillion that is built on sand: it is our whole system of corporate accountability.”

This has dark implications for all stakeholders: In the absence of corporate accountability and the massive expansion of leverage and balance-sheet trickery, Enron-like collapses and scandals are likely to become a more and more common feature of the economic landscape. Unlike with Enron, however, no one goes to jail anymore and none of the Big Four auditors, which are now deemed too-big-to replace, pay more than a token price for their failings and digressions. By Don Quijones.

What happens if cases like this prove to be the rule rather than the exception? Read…  On Closer Inspection, Debt of Bankrupt Spanish Construction Firm Grows Four-Fold

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  51 comments for ““It’s Not only Carillion that’s Built on Sand, it’s our Whole System of Corporate Accountability”

  1. bev says:

    Parallels with sears. Nortel etc etc and division of loyalty.

    • bkennedy says:

      These large corporate entities operate like city states and are laws unto themselves.

  2. Paul Easton says:

    Amazing news! So the corrupt selfdealing of modern capitalism ensures its immanent collapse. The only safe way to preserve your wealth is to hold physical cash or gold. Gold is best because its value will soar.

    • Frederick says:

      I wish you were right about gold but it has proven to be a laggard in the last 6 years Silver too but I still believe the metals day to shine will come But when?

    • walter map says:

      “Gold is best because its value will soar.”

      You can’t eat gold. Here, have a potato, on me.

      You can starve in a vault full of gold. You can survive in a vault full of potatoes until the air becomes toxic, so at least you can linger long enough to partially assess your malign lifestyle choices.

    • intosh says:

      I wouldn’t be surprised if this is only the tip of the iceberg. Lots are built on sand at this point.

      We are in the Age Of Fakes. We can’t trust news, can’t trust analysts, can’t trust financial reports, can’t trust credit rating agencies, can’t trust auditors, and we can’t trust governments.

      It will not end well but it will likely take decades for the masses to wake up.

    • fajensen says:

      The only safe way to preserve your wealth is to hold physical cash or gold.

      Until “Asset Forfeiture” -> The cops will raid your place and nick all of your physical wealth and whatever they can find of the virtual wealth. They will probably use billions on “Big Data” to sniff out potential cash-piñatas, because Terrorism or Russia!

      Had an Indian colleague. His tribe, so to speak, did a lot of business in Africa and Asia where eventually the pogroms come, the alien invaders land and property is confiscated and donated to cronies of El Presidente.

      The key is, according to his experiences, to never have your all of your wealth in the same physical location as yourself. Always use a banking service in two or three different countries not politically aligned with where you live.

      So when the thugs finally come, there is something for them to steal so they don’t murder your family and torture you to get someone to tell where the loot is and there is still something to start over with in another place.

      Of course with GWOT all the world is one place …

      • Paul Easton says:

        If it is hopeless that is even better.

        Lay not up for yourselves treasures upon earth, where moth and rust doth corrupt, and where thieves break through and steal: but lay up for yourselves treasures in heaven, where neither moth nor rust doth corrupt, and where thieves do not break through nor steal.

        Matthew 6:19-20

      • Kraig says:

        >course with GWOT all the world is one place

        Which is kind of the idea behind blockchain but it is not working quite right.

    • Mooncat says:

      Try moving your gold when the revolution comes.

  3. Rates says:

    LOL. It’s not just corporate responsibility. It’s the whole Western way of life and thinking.

    Here’s the Western way of thinking: burn down the forests to save the trees.

    And you wonder why SHTF.

    • Gibbon1 says:

      Is there a word that means rule by narcissists and sociopaths?

      • fajensen says:

        “The Great Tribulation”?

        I strongly suspect there is a more crazy fringe of people ruling the world who actually believe that by engineering the Tribulations, they can basically perform a magic ritual that will summon Jesus and bring Paradise into existence.

        Nuttiness like this is – in my opinion – the only rational explanation for many things, like the current disasters and the political lobbying for even more disasters in the Middle East.

        But, I keep this to myself.

      • Gregg says:

        “Is there a word that means rule by narcissists and sociopaths?”

        Yes, it’s called CONporatocracy.

      • Rates says:

        And what is the common trait among “narcissists and sociopaths”? Thinking of only trees (themselves) instead of the forests.

  4. raxadian says:

    Funny enough the fantasy they were living into could have lasted a few years more if cheap credit was still a thing. Just how many other companies have been living by lies, cheating and borrowing money to keep going on? More than we are comfortable with. Greece “creative accounting” that lead to the Crisis wasn’t something that came out the blue, they just did the same thing some big companies were doing.

    By the end of this year I have no clue how many more companies will have been caught doing this.

    But make no mistake, these few that have been caught so far won’t be the last ones.

    Heck ten years from now there will probably be a book or movie about something like this.

    “Green is good.” indeed.

  5. Arnold Ziffel says:

    Oops…looks like GE is restating prior years earnings.


  6. mean chicken says:

    In my experience, if KPMG is involved you’d better run, not walk.

  7. Paulo says:

    Brought back a memory for me….(this article). I was at work one day and my boss was going on about his new buddy and investment partner. When he mentioned the Partner’s name I advised him to maybe do a little more homework as my friends in the construction business were pretty much telling me this guys huge development project was a disastor. As well, a local CGA looked after the accounts of a few local contractors who were getting the shaft from this guy, and my best friend (and neighbour) used this same CGA for his business accounts thus passing on the information to me over a beer one night. Of course the local paper was touting the development every week as were local RE firms. It was literally front page news with lots of photo-ops, shovel turnings by the mayor, that kind of thing.

    My Boss told me I was crazy and that I should not be saying things like that; that I could get into serious trouble. He was offended and angry with me. I just shrugged and said, “That’s what I heard”. I again advised him to keep his distance, but hey…I was just the employee so what could I possibly know?

    6 months later there were fraud charges and the big development went kaputski. (My boss never mentioned the incident, even though it was a local scandal).

    This guy had an accountant. He also had investors and political support. He had a PR surge and his wife ran the RE sales through her RE company. It was a pretty big local deal run by Jesus, himself.

    There is a really good Netflix series right now called, ‘Dirty Money”. It is gripping!! #1 was about the VW diesel scam. #2 was about Payday loans and Scott Tucker going to jail. Tonight we watched about Valeant. I think #5 is called Trumpworld (just a little teaser). I highly recommend it.

    Anyway, these mega companies are all audited and report out. Many are crooked. In the series there are investigations and lawsuits. People become outraged and start digging like my Jack Russell pup, Molly. They don’t give up and shake them ’till they fall apart. As said, this series is really really interesting and informative.

    • Mary says:

      I’ve been watching the “Dirty Money” docs. Good, but maybe because so inexpensively made, they could be much better.

      Both films examine businesses specifically designed to cheat people (Tucker) or extort money from tragically ill people (Valeant). In both cases the businessmen involved offer the defense, “But it’s legal”. And in most cases it is. How come? And how come the filmmaker never really confronts these very bad actors with the human misery they’ve caused. There is endless footage of Tucker and his sobbing wife whining about the terrible unfairness of it all, but no one forces them to explain how they used the art and science of small print to empty out people’s bank accounts. No doubt they’d say it’s someone else’s fault–probably the victim’s.

  8. walter map says:

    The optimists will assure you there’s bound to be a diamond in these dunghills somewhere, but I’m persuaded that this is just a bizarre and untenable religious belief.

    Art critics assigned to evaluating human civilization spend an inordinate amount of time with their faces buried in their hands, shaking their heads and worrying about their ulcers.

  9. walter map says:

    All my comments lately come up with that “Your comment is awaiting moderation.” thing.

    Whoever’s moderating this site HAS NO SENSE OF HUMOR, which is the one thing that’s going to be transcendently essential if you expect to have any hope of surviving this holyfuckingshitgodawful mess.

    • Wolf Richter says:

      I’m moderating this site, and you’re not aware of the commenting guidelines apparently. Guideline #3 is the 5% guideline:

      “If about 5% of the comments under one article are yours, it’s time to back off. So if the article has 80 comments and 4 are yours, it’s time to slow down.”

      If it’s over 5%, that comment may get blocked or deleted. Under one recent article, 20% of the comments were yours. So here are the guidelines for your perusal:


  10. KPL says:

    “So, why didn’t the auditors make sure that the company discloses those problem to investors?”

    Simple answer, they would not be auditors to the company.

    Similar fraud is the rating agencies. Look at how they rated the dog s$#% in chocolate wrapper as AAA prior to 2007.

    While doing fraud is the business model for corporate, ignoring (or not uncovering) the fraud is the business model of auditors and rating agencies.

    Ever heard of birds of the same feather flocking together…
    Looks like honesty and transparency has no place in business or government today!

  11. GSX says:

    Corporate and Accountability should never be in the same sentence or near each other….ever LOL

  12. James Hammett says:

    The Big 4 much like most auditors are a total waste of space as they cannot be held liable. I have done a forensic audit on work done by one of the Big 4 firms and established they were signing off on annual profits double what had actually been achieved. If you want external audits to have any value there would have to be no limit on auditor liability and automatic liability if the business audited fails within 12 months of the signing of the audit report.

    • Kent says:

      There is an inherent conflict of interest when the auditing firm has to sell its services to a company to start with. I’d rather see the SEC or similar select the auditing firm and payment go through the SEC also.

      • Tom T says:

        So you would trust the government?

        • Mel says:

          As much as KPMG. Maybe more.

        • Kent says:

          I have a vote when it comes to government. I don’t with these corps.

        • richarda says:

          There’s a House of Commons (IIRC) Report on this. Many of the projects were PPP’s – Public-Private-Parnerships, hence the Government is more or less complicit.
          A very broad glance at the accounts and the Report suggests that Carillion was squeezing money out of its subcontractors in a kind of Public-Private-Ponzi-Scheme, well beyond the point where the Government, as Partner should have taken action.
          A best hope is that Carillion gets prosecuted for Fraud and that takes down KPMG as well – Anderson style.

  13. Paul says:

    I ran an accounting firm for 25 years and have written extensively on this subject. What accounting firms do is punt accountability to banks and ratings agencies who punt it right back.

    Cost accounting is a joke. A company can go public at $20 a share, but the stock back at a split adjusted $200 and never call that a loss. They pile on debt with no amortization plan. They pile on pension losses and never adjust their IRR. In 2006, GM put $20 billion in their pension and never wrote it off. I shorted them right after that.

    The problem in America and Europe is two fold. Butt kissing and ineptitude.

    • cdr says:

      I’m an old cost accountant who wrote computer programs to clarify it at an applications level. Users depend on it. Please don’t denigrate it because a few con men learned how to game the financial accounting end of it, including pensions and their goofy ability to depend on projected income using goofy assumptions. Cost accounting is cool. Financial accounting can be a little nebulous. Non-GAAP accounting is a hustle intended to connect with the suckers who have cash to spend.

      The Annual Report, as certified by the CPA, is carefully crafted to tell a specific story. The notes are important. Nobody cares. The average person thinks of it as a guarantee that allows them to stop thinking. The business media also goes along with the show.

      The average CPA, which is a LEGAL designation like a DR. and an Atty, would be nuts to go beyond the SPECIFIC requirements of the profession. BTW, the are called ‘Accounting Standards’ and ‘Auditing Standards’ and they come from a variety of places. Lawsuits, which would be lost, would be the result. The media is basically on the take as it would lose access if it told the truth. Regulators are a part of the show and pretend to assume the media and the accounting profession will fill in the blanks.

      This is the accounting profession at the top level today. Please, don’t insult cost accounting because of these people.

      • cdr says:

        Also, if a cost accountant is telling management what they want to hear for the personal benefit of management, feel free to consider them to really be economists as that is normal practice for them. Economists at the top have no standards similar to those accountants are supposed to follow and live completely in a world of financial make believe for the highest bidder.

        Cost accounting has no legal standards, except how to calculate cost of goods sold and the like, but cost accountants are generally fired if they provide bad costs so that bad decisions are made by real managers.

        Economists rise in the profession if their patrons profit. Think of them as support staff. Give them an objective and they’ll figure out how to make it look like a good idea. They’ll even make up new theories if they have to.

  14. Enrique says:

    This whole dynamic with auditors is of course not new. You really see it in every industry that relies upon supposedly independent ratings.

    Think “property appraiser in real estate market X” – she is supposed to be independent but relies upon a good relationship with the players in the marketplace for future business. And hence could never really be independent.

    What on earth is the solution, though? Ratings/appraisals moved to the public sector? No potential for corruption there obviously (sarc).

    I do wonder about the so-called Big 4. When it was the big 6 no one ever envisioned Andersen going up in a puff of smoke behind the actions of effectively one branch office. And thus could easily envision one of these imploding spectacularly. Just the litigation alone behind an Enron-scale *&^%up in the US would probably kill the involved firm.

    • Petunia says:

      The auditors always know where the bodies are buried because they are the ones burying them. A “special purpose vehicle” is only one of the glorified tombs they built. Any time you see SPV run!

    • Paul says:

      One of the biggest problems with financial statement are that so few non accountants understand them. In the intro of “Financial Statement Analysis” by Bernstein, he says “accounting is a social science”

      People seem oblivious of the fact that earnings per share are estimates AFTER they’re made. Corporate earnings are bases on predictions of the useful life of equipment, amortization of intillectual property, interest rates and pension returns, among othere things.

      The problem is, nobody, especially bankers have any financial interest in learning it.

      • cdr says:


        You are blaming accounting but the fault really lies with the laziness of the average person. The average person wants one number that will instantly give them all the answers they need. No effort needed.

        If they changed, so would everything else.

  15. GSX says:

    They are not worth the paper they audit. No investor can actually believe what they state. Zero has changed since the last meltdown. Just the bad news travels faster when discovered.

    • MaryR says:

      So, no one can believe the Boards of Director, CEO’s, CFO’s, auditors/accounting firms, SEC, ratings agencies, or anyone else putting forth financial results or rating them, on behalf of a corporation.

      Given the above, it follows that no one can evaluate the true financial condition of any corporation other than possibly Warren Buffet, who can parse out the truth from annual reports and sec filings with assorted footnotes, without falling into a coma; kind of like the truffle-hunting pigs or dogs which find the true gems out among the trees.

      Why does anyone invest any money in corporations under these conditions? Who among investors believes the stock market will continue to go up?

      This time IS different, because the house of cards is so high and so filled with debt that only a brief wind can topple the whole shebang from top to bottom…and at any time folks; be sure to watch out for falling bricks.

  16. GSX says:

    From the Buffet article here on Wolfstreet – “In the meantime,” he says, “we will stick with our simple guideline: The less the prudence with which others conduct their affairs, the greater the prudence with which we must conduct our own.”

    Prudence and auditing do not add up anymore. Its on us as investors. If you need to see a broken system this article provides that quite nicely.

  17. Cynic says:

    Ah, it’s a wicked world.

    In a recent prosecution of a Gypsy gang in England, which had enslaved rural workers, their defence was, literally:

    ‘But all the other Gypsies do it, why pick on us?!’

    The judge said ‘And I’m sure your’e right about that, but it’s not a valid defence.’

    (He got suspended and investigated.)

    Moral: when everyone’s misbehaving, join in?

  18. Steve clayton says:

    As a competiting company in 2015-16 we were well aware Carillion were having issues. If we knew then surely the auditors knew. First alarm sign is when the trade creditors all of a sudden go massively higher than previous year.

  19. kiers says:

    Just to put in perspective to the common folks:

    The Top 4 Public “accountancy” firm revenues = $134Bn is tantamount to a “market cap” (if they were publicly listed) of ~$100bn each firm (if revenues are divided equally among the four, and IF they were to be capitalized at a median P/S ratio (~3x) from the S&P 500).

    Take note: that is a HUGE corporation! Coke Market cap = $180Bn, as an example.

    • kiers says:

      sorry if that last phrasing came across arrogant: i’m the most common of common folk, clueless!. (didn’t mean it the way it comes across!)


    Lean Six Sigma Finance Risk Engineering would be the empirical way to force KPMG to admit that they knew the collapse Six Sigma Event was predicable, was most assuredly known to be certain by KPMG auditors, accountants, and Financial Intelligence Analysts, that work in-house at KPMG. Evaluation Risk Analysts are mainstream in all corporate structure and government, all over the Western world. KPMG cannot deny that they knew a Six Sigma Event was certain given the tracking that they have a fiduciary responsibility to provide on all portfolios under their control.

    KPMG is lying outright in hopes that no Finance Engineers or analysts will speak up. Surely lawyers know of Lean Six Sigma Engineering, I hope?


  21. a.hall says:

    Capitalism was exposed as a complete Fraud in 2008, when the Ratings Agencies Lied to Rate Mortgages as AAA; when they were “Dog Shit” according to Goldman Sachs Traders.


      That’s why I refer to Goldman as Goldman Sachs-of-shit. They certainly shovel enough of it our way IMO, and they bundle it in MBS, and refer to it as a not very tasty sandwich in private emails that we are never supposed to attain access to unless Congress is bored and wants something to read for posterity sake.


    • richarda says:

      ISTR that the in phrase in 2008 was “monkey dung”, as used in correspondence between JP Morgan and Lehman staff.

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