KPMG in the UK has been sued for £1.3 billion (€1.55 billion) by the liquidators of Carillion, who claim the auditor missed “red flags” that the UK outsourcer’s accounts were misstated and that the group was insolvent more than two years before it collapsed.
The liquidators allege that Carillion could have avoided a £1.1 billion deterioration in its cash position between December 2016 and its implosion in January 2018 if KPMG had identified that the outsourcer was insolvent at the start of the period, according to a copy of the claim seen by the Financial Times.
The High Court claim was brought by the official receiver, part of the British government’s Insolvency Service, which has hired PwC to run the winding-up of the outsourcer.
Carillion had liabilities of £7 billion and just £29 million in cash when it went into liquidation, endangering thousands of jobs and jeopardising the provision of school meals and the cleaning of hospitals.
Audit overhaul
The company’s failure fuelled calls for an overhaul of UK audit and corporate governance rules and prompted an MP to say he would not hire KPMG to audit “the contents of my fridge”.
The claim, which KPMG has said it will defend, also seeks damages to cover £210 million of dividends paid to Carillion’s shareholders between 2014 and 2016.
Previous court documents showed the claim was expected to be in the region of £250 million. People in the industry said, however, that recent court judgments had redrawn the test for professional negligence, potentially increasing the losses which can be claimed from auditors.
The liquidators allege that KPMG failed to remain independent from Carillion’s management and that one of its auditors “repeatedly accepted hospitality from and offered hospitality to Carillion management and its senior management and failed to respect the proper boundaries of the auditor-client relationship”.
KPMG also helped management to get figures “past” the audit committee and backdated its audit opinion on Carillion Construction Limited for 2016, according to the claim. Carillion’s net assets “were overstated by hundreds of millions of pounds” and it was “balance sheet insolvent” by the end of 2016, it added.
The accounts failed to account properly for goodwill or for revenue and costs under long-term construction contracts, it is alleged.
“Any reasonably competent auditor would have detected and reported these misstatements and the related disclosure deficiencies,” according to the claim.
KPMG also failed to spot that the misstatements “appeared to be the result of deliberate manipulation” of the accounts by two Carillion directors, the liquidator alleges.
In a statement, KPMG said that “we believe this claim is without merit and we will robustly defend the case. Responsibility for the failure of Carillion lies solely with the company’s board and management, who set the strategy and ran the business.”
Defending
Eight former Carillion directors have denied wrongdoing and are defending a separate legal action by the Insolvency Service, which is seeking to ban them from running other UK companies.
According to the liquidators, “the picture presented by the financial statements was of profitable companies, with substantial net assets”. But in reality Carillion’s financial position “bore no resemblance to the reported results and the financial statements were seriously misleading”.
The government contractor had announced more than £1 billion of writedowns in 2017, months after KPMG gave unqualified audit opinions on the accounts.
In accounts published this week, the Big Four firm increased its provision for possible legal payouts and regulatory fines from £92 million to £144 million.
KPMG boss Jon Holt apologised in January, saying that the firm had misled the UK accounting regulator during an inspection of the audit of Carillion’s 2016 accounts. Members of KPMG’s Carillion audit team have denied wrongdoing and blamed each other during a tribunal that is set to resume next week.
The Financial Reporting Council is separately investigating possible failings in the Carillion audits.
KPMG’s UK partners were paid an average of £688,000 last year, their biggest payout since 2014, despite a series of scandals which have prompted it to withdraw from bidding for government contracts.
– Copyright The Financial Times Limited 2022
