Carillion Scandal

Carillion scandal
External Auditors and Internal Control audit

issues
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Contents
Introduction.....................................................................................................................................3
Internal Control Audit Issues...........................................................................................................3
Missing red flags..........................................................................................................................3
Problem contracts and cash flow constraints..............................................................................3
Aggressive accounting, revenue recognition and goodwill.........................................................4
External Audit Issues........................................................................................................................4
Conclusion........................................................................................................................................4
References.......................................................................................................................................5
Introduction
This report about Carillion includes the events in regards to the 2016 audit. A series of internal
problems not detected by internal control issues along with the external auditors include missing
red signals, aggressive accounting, as well as pension losses that reach almost a billion pounds.
On March 31, 2017, KPMG, an external auditor of the Carillion, approved the 2016 audit four
months before the Carillion set 845 million pounds in asset value. By the beginning of 2018,
Carillion went bankrupt, with a cash reserve of just over 29 million pounds as well as a debt of
more than 1.3 billion pounds.
Internal Control Audit Issues

The three internal control audit issues are as follows:
Missing red flags

The management partner asked three auditors: Michell Hinchcliffe, the KPMG auditor, Peter
Meehan, the KPMG Carillion external auditor, as well as Michael Jones, the Deloitte Carillion
internal auditor. They have announced that they are not aware of the red flag surrounding the
profit warning issued in July 2017, because Carillion has a legal reserve to mitigate these issues.
In addition, Carillion shares were the most underrepresented in the stock market. This should
indicate to the auditor that the company is selling Carillion shares "for concern over many issues
such as strategy, financial management as well as corporate governance" (Standard Life
Aberdeen).The co-chairman of the committee, Rachel Reeves, said everyone, except the
directors as well as company auditors of Carillion, was aware of the problems in the company as
well as regulatory authorities as well as company auditors did not try to investigate the details of
the other red flags (Mabbett, 2018).
Problem contracts and cash flow constraints

The Partner Management Committee also referred to the four problematic contracts that led to
the fall of Carillion. These agreements have caused 200 million pounds of outstanding bills to
pile up as well as aggravate the cash flow problems of Carillion. Due to the nature of all
contracts, Carillion was not able to "intentionally cancel" the project even though it was not paid.
To monitor these persistent issues, directors as well as company auditors did not attempt to ease
the scope of the unpaid bill.
Aggressive accounting, revenue recognition and goodwill
To increase revenue recognition, the former CFO's Zafar Khan had a more risky contract. KPMG
concluded in a management assessment that "the group lacked consistency as a whole as to how
they perceived the value of the claim."But Mihan said it was not until after the 2016 audit was
approved. Factors that the auditor did not take into account include disabling management
controls as well as internal shifts from careful decisions to optimistic decisions. The auditor also
failed to fully test the "confidence in cash flow in the Goodwill Reduction Assessment" under the
Financial Reporting Council (FRC).The Carillions were heavily dependent on goodwill when
evaluating assets.84% of the balance sheet was made up of goodwill (Peate, 2018).
External Audit Issues

1. KPMG received a salary of 29 million pounds as an auditor of Carillion over 19 years,
but the survey found that the "fantastic numbers" as well as "Carillion's lack of expert
skepticism over accounting decisions made, so KPMG helped them during their tenure as
an auditor of Carillion.
2. As per the Deloitte audit, who said they failed to manage risk as well as finance despite
being paid 10 million pounds, as well as EY, who provided turnaround advice that failed
while being paid 10.8 million pounds.
3. The survey also posted on the Financial Reporting Council, which failed to follow up on
the concerns identified in 2015, as well as on plans to implement pension contributions,
but failed to implement (Sweet, 2018).
Conclusion
The directors as well as auditors were not effective in implementing a red signal management,
losing revenue, cash flow issues, or considering ways to reduce the spread of assets, because the
majority of the Clarion assets depended on goodwill. Because internal as well as external
auditors were unable to anticipate the collapse, the Carillion case is a story that warns that
auditors should test control, evaluate, recommend, as well as state their opinions.
References
Mabbett, D., 2018. Carillion, Procurement and Industrial Policy. The Political Quarterly, 89(2),
pp.169-171.
Peate, I., 2018. The Carillion crisis: the impact. British Journal of Nursing, 27(16), pp.917-917.
Sweet, R., 2018. Carillion and our unvirtuous circle. Construction Research and Innovation,
9(1), pp.1-2.
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Carillion scandal

External Auditors and Internal Control audit

Internal Control Audit Issues

Missing red flags

Problem contracts and cash flow constraints

External Audit Issues

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