Outside the United States, public accounting firms are allowed to provide other services to their audit clients. But the sudden liquidation of Carillion PLC, Britain’s second-largest construction company, has led to calls for change in the global audit industry. That includes some who propose that firms that provide assurance services be banned from also engaging in consulting and advisory work.

Carillion was a diversified multinational facilities management and construction services company that employed 19,500 workers in the United Kingdom and 43,000 worldwide. It had 2016 revenue of £5.2 billion, or about $7 billion, before running into financial difficulties and entering liquidation.

The company first announced difficulties in July 2017 when it referred to an £845 million ($1.1 billion) impairment charge in its construction services division, mainly relating to three loss-making U.K. projects and costs arising from Middle East projects. The CEO and five directors stepped down, and the board appointed a temporary CEO. As a consequence of these events, the company was removed from the FTSE 250 Index.

More bad news came in September 2017 when Carillion announced a loss of £1.5 billion (close to $2 billion) for the first six months, including a further write-down of £200 million ($262.4 million) in the company’s service division. Carillion made a further profit warning in November 2017, announcing that it would breach banking covenants in December with full-year 2017 debts forecasted to reach as much as £925 million ($1.2 billion). The end came in mid-January 2018 as Carillion announced it was going into liquidation and had notified the London Stock Exchange.

A 2018 joint committee report of a U.K. parliamentary inquiry said that Carillion was “a story of recklessness, hubris and greed [and] its business model was a relentless dash for cash” and accused its directors of misrepresenting the financial realities of the business. “Carillion was unsustainable,” the report said. “The mystery is not that it collapsed, but that it lasted so long.” The report’s recommendations included regulatory reforms and a possible breakup of the Big 4 accounting firms. This evaluation is in stark contrast to the assertions in Carillion’s announcement of 2016 results: “Our sector leadership in sustainability also remains fundamental and an integral part of the Group’s strategy and gives us a competitive advantage.”

A May 15, 2018, Guardian story outlined the accounting tricks played by Carillion, including the July 2017 admission that, realistically, it couldn’t bring in £729 million ($956.3 million) of previously recognized revenue. Also, management overrode the loss findings of an independent peer review of a contract to build the Royal Liverpool Hospital and insisted on reporting a healthy profit, which was false. Carillion regularly booked revenue that it was uncertain of receiving from clients, called “traded not certified” revenue, which amounted to £294 million ($385.2 million) at the end of 2016, more than 10% of construction revenue. A third scheme allowed suppliers to obtain cash from the company’s bank account without action by Carillion or recognition of the transaction on its books as a liability, a trick known as “reverse factoring.” The parliamentary report said, “The only cash supporting its profits was that banked by denying money to its suppliers.”

The report also said that auditors played a big role in widespread failures of oversight. In particular, it said, “KPMG, Carillion’s outside auditor for 19 years, was ‘complicit’ in questionable accounting practices at the company, complacently signing off on its directors’ ‘increasingly fantastical figures.’”

KPMG wasn’t the only firm to receive criticism in the report. Deloitte, which acted as Carillion’s internal auditor, had particular responsibility for matters of risk management and internal controls. Parliament found the firm was “either unable to identify effectively the risks associated with Carillion’s business practices, unwilling to do so, or too readily ignored them.” Ernst & Young provided “six months of failed turnaround advice” to Carillion. This left PricewaterhouseCoopers to “name its own price” to manage the liquidation of the company, estimated to run in the many millions of pounds.

A February 2018 Independent story reported that the KPMG audit firm partner “couldn’t turn the clock back but wouldn’t have done anything differently if he could.” More recently, the U.K. auditing regulatory body Financial Reporting Council (FRC) stated that “Big Four audit practices must act swiftly to reverse the decline in this year’s audit inspection results, while KPMG, in particular, has shown unacceptable deterioration in quality.”

Globally, consulting services have risen dramatically in importance to the Big 4 firms, with revenue from consulting and advisory services increasing by 44% since 2012, while audit revenues increased only 3% in the same period. The bulk of firm revenue now comes from consulting and advisory services.

While the Sarbanes-Oxley Act of 2002 forbids accounting firms from providing many consulting services to their clients in the U.S., this prohibition doesn’t exist elsewhere. Heightened focus on the consulting that audit firms do, which is more profitable than auditing due to downward pressure on fees, leads to concern over a diminishing of required auditor independence and professional skepticism. A May 2018 story in the Financial Times reported, “The Big Four accountancy firms have drawn up contingency plans for a breakup of their U.K. businesses” in response to regulatory pressure. The spotlight of investors, regulators, and the general public is now focused on audit quality worldwide.

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