The UK agency tasked with unwinding Carillion is preparing to sue KPMG for £250m over alleged negligence in its audits of the outsourcing group that collapsed in 2018.
The significant claim will be the latest blow to the Big Four accounting firm, which is also under investigation by regulators for its work on Carillion. It is expected to be the first time that liquidators working for the British government have attempted to sue a large audit firm to recoup losses from a major insolvency.
The official receiver, a civil servant employed by the Insolvency Service to liquidate Carillion, has claimed in legal documents that the outsourcer’s board of directors believed the business was “profitable and sustainable” as a result of KPMG’s clean audit opinions. It said the unqualified audits led the directors to pay out almost £250m in dividends and advisory fees over two years.
The claim was made public on Tuesday as part of a court application brought by the official receiver in an attempt to access key KPMG audit documents. KPMG has rejected the application for the documents.
A court filing by lawyers for the official receiver said KPMG’s audit files would be core evidence in any future case. It said: “KPMG’s breaches of contract and duty caused [Carillion] to incur losses which it would not have done if it had been aware of its true financial position.”
They claimed KPMG may be liable for £234.2m in dividends that were paid out to Carillion’s shareholders between 2014 and 2016, as well as advisers’ fees of £17m “which would not have been paid if the misstatements in the financial statements had been detected by KPMG”.
The proposed claim will allege that KPMG failed to detect misstatements in the accounting of revenue and liabilities of its construction contracts and that it was negligent in its accounting for goodwill, which is the future value of companies it had purchased.
In 2017, reviews of Carillion’s contracts resulted in a writedown of three projects by £845m and an impairment of goodwill totalling £134m in relation to its construction business.
KPMG said in its skeleton argument that disclosing documents before the legal claim was filed was “unusual” and “unnecessary” and that Carillion’s liquidators should rely on the company’s own documents. In relation to the proposed negligence claim, it said: “Carillion’s first task must be to identify material misstatements in its own accounts. This is essential, because without it there can have been no causative negligence.” KPMG declined to comment further on the proposed claim against it.
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 profit warning four months after KPMG signed off on its accounts in 2017. 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, which has been appointed by the official receiver as the special manager to the liquidation.
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.
KPMG signed unqualified audit reports on Carillion’s financial statements between its appointment in 1999 and 2016. In 2017, auditors at KPMG declared the company was a going concern in its interim results, despite the large writedowns.
KPMG’s audit work for Carillion between 2013 and 2017 is under investigation by the Financial Reporting Council, which is expected to publish its initial findings this summer. KPMG has previously said it conducted its role as Carillion’s auditor “appropriately and responsibly”.
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