Auditing isn’t brain surgery. No one dies if you mess up. But there is always the risk of bringing down a government contractor and causing one of the biggest corporate collapses in British history. So there’s that.

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Haircut

It’s always unnerving when banks run into trouble, especially in difficult economic times. Those of us old enough to remember 2008 will still be scarred by the images of bankers leaving Lehman Brothers on the day it collapsed. So when the UK’s Metro Bank announced its second emergency cash injection in four years this week, it was only partially a cause for celebration.

As part of the deal, Metro Bank took a haircut on £250 million ($308 million) of its riskier bonds. A haircut is the reduction applied to the value of an asset, such as a bond. When creditors lend money to a company, they ask for collateral – something that can be sold to pay back their loan if the company can’t make the payments.

In Metro Bank’s case, the collateral was its tier 2 bonds. But financial markets can be volatile. If the price of those bonds fall, selling them won’t raise enough money to repay the debt. By taking a haircut to write down the value of the asset, you create some wriggle room in case the worst-case scenario happens and bondholders need their money back.

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KPMG hit with record fine for Carillion failings

KPMG has been ordered to pay a £21 million ($26 million) fine for failings in its auditing of the collapsed government contractor Carillion. It’s the biggest penalty ever issued to an auditor by the UK regulator, which said the number of errors were “exceptional” and “failed to adhere to the most basic and fundamental audit concepts.”

Carillion’s collapse was one of the UK’s biggest ever corporate casualties. It was liquidated in 2018 after the UK government refused to bail it out. Almost 3,000 jobs were lost and suppliers and subcontractors were left with £2 billion in unpaid bills.

The fine marks the culmination of a five-and-a-half year investigation, and was reduced from £30 million to reflect KPMG’s cooperation with the inquiry. The firm was also ordered to pay £5.3 million in costs and two of its former partners were fined £350,000 and £70,000 respectively.

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