118. When we questioned KPMG about the provision Carillion made in July 2017, KPMG's responses mirrored those of Carillion's directors: the causes all related to events that took place after the publication of the accounts on 1 March 2017. They listed factors including "worsening delays leading to forecast reassessments", "unexpected site-specific developments" and "the developing political and economic situation in the Middle East, particularly events in Qatar", as being responsible for the contract provision.360
119. Those conclusions followed an enhanced management review of key contracts in May 2017, which was audited by KPMG. KPMG noted that the review was a "deep dive", and "beyond the level of detail that would typically be completed by the audit team".361 They also highlighted some of Carillion's aggressive accountancy practices, including that "claims are booked earlier in the Group than would be by certain others in the industry" and that there was "a lack of consistency and guidance around the Group in when to recognise value on claims".362 That these findings only became apparent after "deep dives" raises questions over the adequacy of KPMG's core audit work. Peter Meehan, the KMPG Audit Partner who signed off the accounts, told us that his company's previous work was extensive, citing large numbers of site visits.363 Yet KPMG neither identified nor challenged Carillion's aggressive approach to revenue accounting on specific contracts.
120. KPMG was aware that recognition of contract revenue was the most significant risk in Carillion's accounts: it is acknowledged as such in its 2016 audit report.364 The report narrative, however, merely described in general terms the inherent risks around accounting for construction contracts and described generic audit procedures carried out to mitigate that risk. KPMG did not in any way allude to Carillion's unusually optimistic outlook. Murdo Murchison told us that his investment company relied on audited financial results, but they were "clearly not a good guide" to the state of Carillion.365 More valuable information was included in KPMG's February 2017 presentation to the Carillion audit committee, which noted that "overall the traded position on contracts is challenging, but when considered in conjunction with the provisions [ ... ] is reasonable".366 That conclusion too was flawed, but it did at least admit to contract challenges. This concern was not, however, deemed worthy of inclusion in KPMG's published audit report.
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360 Letter from KPMG to the Chairs, 2 February 2018
361 KPMG, Enhanced contracts review and half year update, 9 July 2017 (not published)
362 As above.
363 Q789 [Peter Meehan]
364 Carillion plc, Annual Report and Accounts 2016, p 86
365 Q1004 [Murdo Murchison]
366 Carillion plc, February 2017 Audit Committee papers (not published)