Two powerful panels of MPs are piling pressure on the world’s biggest audit firms to disclose their links to Carillion as they prepare to quiz the collapsed construction group’s former bosses.
Sky News has learnt that the big four auditors – Deloitte, EY, KPMG and PricewaterhouseCoopers (PwC) – have received letters from the Business and Work and Pensions select committees demanding that they reveal within a week work they had undertaken for Carillion since 2008.
The move comes amid growing concern about the potential conflicts of interest which can arise within accountancy firms during major company restructuring and insolvency processes.
PwC, which is acting as ‘special manager’ in the liquidation, had also been advising the Government and on aspects of Carillion’s pension liabilities while it was still a solvent company.
A City source said that Rachel Reeves and Frank Field – who chair the two parliamentary committees – were engaging in a “fact-finding mission” with the big four auditors.
Image: Labour MP Frank Field
The insider said the MPs had sent a detailed letter to Bill Michael, the UK chairman of KPMG, which had audited Carillion since the company was created in 1999.
KPMG signed off the company’s accounts last March, four months before it announced a massive profit warning triggered by an £845m writedown of the value of its contracts.
The letter to Mr Michael asked him to explain why the audit opinion on those contracts had changed and to clarify whether KPMG should have been more proactive in highlighting the risks arising from changes to accounting standards in Carillion’s 2016 annual report, according to one source.
The MPs also challenged Mr Michael to explain why KPMG had allowed the construction group to rely on more than £1.57bn of goodwill to strengthen its balance sheet, the source added.
Carillion’s former finance director, Zafar Khan, is expected to give evidence to the select committees’ inquiry next week.
Mr Khan, who was ousted in September, will be followed in the coming weeks by Richard Howson, the former chief executive, and Philip Green, the company’s chairman.
Carillion’s collapse has threatened thousands of British jobs and cast a huge shadow over the entire outsourcing sector.
The company held over 450 Government contracts when it plunged into compulsory liquidation last week, and has raised profound questions for ministers, lenders, shareholders and pension regulators.
Sky News revealed last week that Carillion’s pension deficit at the time of its collapse stood at £2.6bn, according to a calculation used to assess the cost of insuring its liabilities.
That was a far higher sum than the £587m accounting deficit referred to by its former chief executive in a High Court witness statement.
The £2.6bn figure is relevant because added to Carillion’s other debts, including those owed to its banks, it takes Carillion’s total financial obligations when it collapsed to roughly £5bn.
The vast scale of the company’s total indebtedness further dwarfs its comparatively minuscule market capitalisation of just £61m when the Official Receiver was called in.
Although the pension schemes will lodge a claim for £2.6bn with the liquidator, there is no prospect of that money being paid, since Carillion failed with just £29m on its balance sheet.
The Pension Protection Fund will now step in to provide compensation to 28,500 pension scheme members, with the total bill facing it likely to be up to £920m.
A source said on Thursday that the two select committees had asked KPMG to explain whether it had verified the validity of actuarial assumptions relating to Carillion’s pension schemes.
More from Carillion
The MPs’ inquiry is just one of several launched in the wake of the company’s collapse, with the Insolvency Service, Financial Reporting Council and Financial Conduct Authority all examining various aspects of one of the UK’s most significant corporate insolvencies for decades.
Carillion’s liquidation has sparked fears for thousands of smaller subcontractors which undertook work for the company, which was a major partner of Network Rail and had wide-ranging involvement in Britain’s schools, hospitals and prisons infrastructure.