The street level sign of the KPMG buliding in downtown Los Angeles is shown April 10, 2013. In a blow to one of the world's largest accounting firms, KPMG said it resigned as auditor of two U.S. corporations amid an FBI investigation into insider trading allegations involving leaked information and a former senior partner. REUTERS/Sam Mircovich (UNITED STATES - Tags: BUSINESS) - RTXYGLE
The legal challenge has gathered momentum in recent weeks after the law firm of Quinn Emanuel appointed barristers © Reuters

KPMG faces the threat of a legal challenge from the UK agency tasked with unwinding Carillion, the outsourcer that collapsed last year, over allegations that the Big Four accountancy group’s audit of the company was negligent.

US law firm Quinn Emanuel has been hired to pursue a legal case by the official receiver, a civil servant employed by the Insolvency Service on behalf of Carillion’s creditors, and PwC, the special manager of the company’s liquidation, according to two people familiar with the matter.

Quinn Emanuel was first retained late last year, but the legal challenge has gathered momentum in recent weeks after the firm appointed barristers. It is now preparing to notify KPMG that it plans to file claims at the High Court, the people said.

KPMG will have three months to respond to the firm’s letter, meaning a claim could be filed early next year.

Carillion, which employed about 19,000 people in the UK and had major government contracts including for the construction of the HS2 rail line, issued a profits warning four months after KPMG signed off on its accounts. It collapsed five months later, in January 2018.

The outsourcing group owed more than £1.3bn to its banks and had a pension deficit of about £800m while having just £29m in cash. The bankruptcy process is expected to cost the taxpayer about £148m, including a £50m payment to PwC, according to estimates by the National Audit Office.

KPMG is already under investigation by the Financial Reporting Council, the UK’s audit watchdog, for its work on Carillion.

The Big Four firm has previously said it believed it had conducted its role as Carillion’s auditor “appropriately and responsibly” and would co-operate fully with the FRC investigations.

KPMG declined to comment on the potential lawsuit. Quinn Emanuel, the official receiver and PwC also declined to comment. 

If a lawsuit is filed against KPMG, it would be one of just a handful of public legal cases brought against Britain’s largest audit firms by the administrators or liquidators of failed businesses. 

KPMG has also been told by the board of Goals Soccer Centres to prepare for a legal challenge over claims it was negligent in its tax accounting of the football pitch operator.

The parliamentary inquiry into Carillion’s demise said KPMG was “complicit” in the outsourcer’s aggressive accounting policies as it failed to challenge the company’s management and missed warning signs in its financial statements in relation to contract revenue and goodwill. 

The MPs’ inquiry also ordered rival Big Four firms EY, PwC and Deloitte to provide details on services provided to the Carillion over the past decade.

The potential legal challenge to KPMG is being led by Quinn Emanuel partners Sue Prevezer QC and Matthew Bunting, said one person with knowledge of the matter.

The firm, which built a reputation as a tough litigator in the US before establishing a practice in London in 2008, is also representing UK consumers in an unprecedented class action against Mastercard for £14bn in damages over alleged illegal credit card fees.

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