KPMG faces £1.3bn lawsuit over Carillion collapseby
The drama between KPMG and Carillion has had yet another twist today with the Big Four firm getting struck with a lawsuit that will cost it up to £1.3bn.
The Official Receiver is suing KPMG for failing in its role as the auditor of Carillion and is seeking damages of more than £1bn - the same amount Carillion paid out in dividends, advisory fees and losses as it continued to trade.
The eye-watering legal claim adds to KPMG’s current Carillion headaches, as it is also in the throes of a disciplinary tribunal over its role in the demise of the collapsed construction company.
The claim by the Official Receiver, which is acting on behalf of Carillion’s creditors, has pinned the blame on KPMG for failing to spot misstatements in the group’s accounts.
However, KPMG is not taking the liquidators’ legal challenges lying down. A spokesperson dismissed the merit of the claim.
“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.”
Carillion had £29m cash and nearly £7bn liabilities when it plunged into administration in January 2018, threatening thousands of jobs, leaving shareholders out of pocket and forcing the government to intervene.
The legal action is claiming damages on the creditors’ behalf of more than £1bn, which includes £210m paid in dividends, £31m paid out in professional fees, and trading losses of more than £1bn.
The lawsuit claims that the dividends totalling £210m would never have been paid out if the company’s accounts had been correctly audited and fairly stated.
Negligence and red flags
The negligence claim accuses KPMG of missing multiple “red flags” which should have alerted the auditors to a “clear and obvious risk of misstatement”.
The Official Receiver claims in the lawsuit that KPMG “failed to maintain professional independence” and engaged in “an improper relationship with management while conducting the audits”.
Peter Meehan, the former KPMG partner in charge of the Carillion audit, was also singled out in the lawsuit with evidence that alleges he “repeatedly accepted hospitality from and offered hospitality to Carillion and its senior management”.
The claim also accuses Meehan of offering assistance to executive management in “getting figures ‘past’ Carillion’s Audit Committee” and that he "backdated KPMG’s audit opinion in respect of certain of Carillion’s accounts".
Investigations into KPMG's audits have also concluded that “no reasonably competent auditor would have signed unqualified audit opinions on the Carillion group’s 2014-16 financial statements”.
A spokesperson for the Official Receiver said: “Following extensive investigations looking into the causes of Carillion’s liquidation, the Official Receiver has submitted a claim to the High Court concerning KPMG’s role as auditor for the company’s accounts.
“The Official Receiver has taken this action in the interests of creditors who lost substantially in the liquidation. The decision is based on legal advice, which is that KPMG is answerable to Carillion’s creditors for a portion of their losses.”
KPMG served as Carillion’s auditor for 19 years, received £29m fees in the process, and did not qualify its audit opinion on the accounts.
Months before it eventually went bust, in 2017, Carillion had writedowns worth more than £1bn, which exceeded its market capitalisation and was equivalent to the combined total of the previous seven years’ profit.
Since Carillion entered administration, and caused one of Britain’s biggest insolvencies, KPMG has faced scathing criticism from MPs and regulators.
In 2018, Rachel Reeves, the then chair of the BEIS committee, said KPMG had some serious questions to answer and questioned whether the Big Four firm was “clouded by its cosy relationship with the company and the multi-million-pound fees it received.”
In the wreckage of Carillion, the government has announced major audit reforms to “restore business confidence” and to break up the stranglehold the Big Four has over the market.
KPMG is now fighting Carillion accusations from all sides with this lawsuit adding to the damning Financial Reporting Council's disciplinary tribunal, where the Big Four firm had already admitted to fabricating documents and six former KPMG auditors are accused of hoodwinking the regulator, including Peter Meehan.
KPMG’s chief executive Jon Holt said at the start of the tribunal that it was “clear” the Big Four firm had misled the regulator. In a memo to staff, following the firm’s tumultuous start to 2022, he asserted that “he is the right person to deal with this”.
Today's lawsuit ends a rollarcoaster week for the Big Four firm, starting off with KPMG announcing 10% growth in its annual results and a bumper pay day for partners last year of £688,000.