KPMG subject of second UK investigation over Carillion audit

By Huw Jones

LONDON (Reuters) - Britain's Financial Reporting Council (FRC) has opened a second investigation into how accounting firm KPMG audited the books of collapsed UK construction company Carillion, the watchdog said on Tuesday.

The FRC said that KPMG, one of the world's "Big Four" accounting firms, "self reported" additional material related to Carillion's audit for year-end 2016.

The audit for that year was one of 160 company audits in the FRC's routine annual quality review.

KPMG said on Tuesday it was reviewing its response to the FRC's quality review of Carillion's 2016 audit after concerns were identified in connection with a small number of documents provided to the FRC.

"On discovery of this information, we immediately reported our findings to the FRC," KPMG said.

The accounting firm said it stood by its "conclusions" for Carillion's audit for that year and it has reached no conclusion regarding individual responsibility.

KPMG has engaged outside counsel to investigate the circumstances of the quality review and the conduct of individuals involved.

The watchdog said last year that it was investigating KPMG's audits of Carillion for 2014-2017 and the conduct of two former finance directors, Richard Adam and Zafar Khan. The second investigation was opened in November and made public on Tuesday.

"The FRC continues to progress its original investigations in relation to the collapse of Carillion in conjunction with other regulators," the watchdog said in a statement.

"A key area of focus has been 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."

"The investigations are also considering conduct relating to pension liabilities, goodwill, cash disclosures and going concern," the FRC said.

A second investigation piles more pressure on KPMG in a sector that is already in the political spotlight.

Carillion's collapse angered lawmakers who called on the Competition and Markets Authority to consider breaking up the "Big Four" accountants to increase competition and audit quality.

It also raised questions about the FRC's ability to police accounting firms quickly and effectively.

Last month two government-sponsored reports recommended replacing the FRC with a new watchdog, and forcing large, listed companies in Britain to hire two auditors.

The FRC said it was committed to completing its investigations promptly and thoroughly.

(Reporting by Huw Jones; editing by Jason Neely)