195. Regulation should not be the sole driver of audit standards. As with other markets, competition between providers should place upwards pressure on the quality of services and downwards pressure on the price. KPMG's cursory approval of Carillion's annual accounts as external auditor for all 19 years of the company's existence bore none of the hallmarks of competition. This is far from an isolated problem: KPMG approved upbeat assessments of the state of HBOS months before the bank's spectacular 2008 collapse.
196. KPMG's close relationship with Carillion was not limited to its long tenure. Richard Adam, the longstanding Finance Director, and Emma Mercer, who took over that role, qualified as accountants at the firm.524 This is far from unusual: the Competition Commission found that two-thirds of chief financial officers of large listed and private companies were Big Four alumni. Alongside regular audit fees, which averaged £1.5 million per year between 2008 and 2016, KPMG was paid £400,000 per year on average for additional taxation and assurance services.525
197. Unlike in other markets, incentives to enforce the quality of audit services are skewed. The primary users of the audited accounts are shareholders and potential shareholders, who rely on trusted information about public companies.526 The audit is, however, paid for by the company, and directors can benefit from an auditor who is willing to turn a blind eye to sharp practice. This is particularly true when an established big-name brand brings credibility to financial statements. The auditor can expect a steady income for up to 20 consecutive years of audits. For example, in its report on KPMG audits of Pendragon, a motor retail group, the FRC found that the auditor operated with insufficient independence from the company.527 The FRC is currently investigating KPMG's audits of the accounts of Rolls-Royce Group over a period when the engineering company admits it committed a series of bribery and corruption offences.528 Murdo Murchison said he would write to the audit committee chairs of the two other UK listed companies Kiltearn Partners invests in audited by KPMG, seeking assurances about the quality of that work.529 Euan Sterling, of Aberdeen Standard Investments, another company that invested in Carillion, said "reading a set of accounts is like reading a mystery novel".530
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524 Carillion plc, Annual Report and Accounts 2015, p 42; "Carillion, KPMG face Financial Reporting Council's biggest ever inquiry", Inside Business, 9 February 2018
525 Letter from KPMG to the Chairs, 2 February 2018
526 Competition Commission, Statutory audit services for large companies market investigation: summary of report, October 2013, para 6
527 Financial Reporting Council, Outcome of disciplinary case against KPMG Audit plc, a Member Firm of the ICAEW and Mr Greg Watts a partner of KPMG LLP, the parent of KPMG Audit plc, and a Member of the ICAEW, 3 February 2015
528 Financial Reporting Council, FRC launch investigation into KPMG in relation to the audit of the financial statements of Rolls-Royce Group, 4 May 2017
529 Q1128 [Euan Stirling]
530 Q1129 [Euan Stirling]