UK watchdog finds apparent breaches by KPMG's Carillion audit

By Huw Jones

LONDON (Reuters) - Britain's accounting regulator said it has delivered its initial report into KPMG's audit of builder Carillion <CLLN.L>, an indication that apparent rule breaches have been found.

The construction company's collapse in 2018 angered lawmakers who called on the Competition and Markets Authority to consider breaking up top accountants to increase competition and auditing standards.

After an initial investigation, the FRC either closes the enforcement case or, if apparent breaches have been found, delivers an Initial Investigation Report.

In a rare statement reflecting the case's high profile, the Financial Reporting Council (FRC) said it has delivered an IIR on KPMG's audit of Carillion for the years ended 2014 to 2016, and additional audit work in 2017.

A copy of the report, which has not been published, has been sent to KPMG, one of the world's Big Four auditors, for a response.

"We believe it is important that regulators acting in the public interest review the audit work related to high profile cases such as Carillion and we are cooperating fully with the FRC’s investigation," KPMG said in a statement.

"We can confirm we have received the Initial Investigation Report but because the regulatory process is ongoing, we cannot comment further," KPMG said.

A key area of focus in the FRC's investigation was the financial performance of Carillion's major contracts in both the construction and services divisions, and whether Carillion management and its auditors ensured that this was appropriately reported in its financial statements.

Once the FRC has received KPMG's response, it will decide whether to continue with the enforcement case or not. If the FRC continues with the case, its findings and sanctions can be contested by KPMG at an independent tribunal.

Fallout from Carillion and the collapse of retailer BHS is already being felt in the audit sector with the Big Four firms having to tell the FRC next month how they will ring fence their UK audit arms to help improve standards.

(Reporting by Huw Jones; Editing by Kirsten Donovan)