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KPMG faces £1.3bn lawsuit over Carillion collapse

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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. 

3rd Feb 2022
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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.”  

The lawsuit

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.”

History

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.

 

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Replies (21)

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By Justin Bryant
03rd Feb 2022 17:20

“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.”

Well, they would say that, wouldn't they?

It's interesting that it's The Official Receiver suing. That must be a bit worrying if you're a KPMG partner. I wonder how much they'll provide in their accounts for this and restrict drawings etc.

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Replying to Justin Bryant:
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By wilcoskip
03rd Feb 2022 18:08

I'm very much looking forward to seeing this one play out.

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By Hugo Fair
03rd Feb 2022 22:58

And you don't see a 'story', Richard, that draws from both your KPMG article of 2 days ago ("KPMG partners bank £688,000 payday") and the above?
Not just a passing mention in the final sentence, but some serious 'join the dots' analysis?

It doesn't have to be libellous or a pure opinion piece; but stating facts and asking pointed questions is what I might've expected ... without having to wait for P Eye.

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Replying to Hugo Fair:
Richard Hattersley
By Richard Hattersley
04th Feb 2022 18:21

Funny you should say that Hugo. This was a straight news article, which is why that information was included, but AccountingWEB will be ramping up its opinion coverage in the coming weeks and this story will be a shot in the arm for those columns.

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By ShaunEllis
04th Feb 2022 09:29

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.

Doesnt this just join the long list of reforms? It is clear that big business bamboozles the regulator and that the RSB's who are tasked with maintining standards are simply mere proxies with quasi-legal status.

Or, alternatively one Partner has been bamboozled and lead a once venerable Accounting firm into an Andersen scale collapse.

The story has different players, an yet the stage play is a repeat.

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By SJH-ADVDIPMA
04th Feb 2022 10:52

These audit companies IMHO, talk the talk, especially KPMG with ESG etc, yet ultimately scam stakeholders, and take a large part of the pie for doing a poor job.

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By C J EYRE
04th Feb 2022 10:56

I smile when I hear of these fines. As an unqualified accountant, who has been trading for over 40 years, I still have problems with some Banks and Building Societies in completing references for long term clients. Often they will not accept them because I am unqualified. However, they appear to be quite happy to accept them from the bid 4 who keep getting fined for what appears poor workmanship.

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Replying to C J EYRE:
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By lh3f9764bg1g
04th Feb 2022 11:33

I hear you brother/sister!

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By thomas34
04th Feb 2022 11:16

Big 5 - Arthur Andersen = Big 4 - KPMG = Big 3.

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Replying to thomas34:
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By AndyC555
04th Feb 2022 12:02

Once upon time it was the 'big' 6 before PW and Coopers merged. Since they seem to hoover up most of the work despite being smaller in number, I don't think 'big' is useful any more.

The 'Gigantic 4'? 'The F*ing Enormous 3'?

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Replying to AndyC555:
paddle steamer
By DJKL
09th Feb 2022 11:07

Big 8 in my day. (mid 80s)

Price Waterhouse
Arthur Anderson
Arthur Young
Peat Marwick
Ernst & Whinney
Deloitte, Haskins and Sells
Coopers Lybrand
Touche Ross

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By Marlinman
04th Feb 2022 11:35

Hahahaha, I wonder what their spokesman will say if they lose. By now they should have a good bank of excuses.

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Replying to Marlinman:
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By Truthsayer
04th Feb 2022 12:10

You can say that again.

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By Marlinman
04th Feb 2022 11:35

Hahahaha, I wonder what their spokesman will say if they lose. By now they should have a good bank of excuses.

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By Marlinman
04th Feb 2022 11:35

Hahahaha, I wonder what their spokesman will say if they lose. By now they should have a good bank of excuses.

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By Springfield
04th Feb 2022 13:35

I've just re-read "The Smartest Guys in the Room" - the detailed story of the rise and fall of Enron, which also took Arthur Anderson down with it.

The title by the way is ironic - a business top heavy with MBA's who it turned out couldn't run a proverbial whelk stall. Or if they did they would post 10 years projected sales of whelks as income on day one, and then borrow money on a friends credit card, secured on shares in the whelk stall, (off-balance sheet you see) to provide the actual cash to fund the huge bonuses they would then pay themselves.

All signed off by an auditor too close to the client and apparently unwilling or unable to understand the connection between profit and cash.

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By farrcorfe
05th Feb 2022 11:36

Is the £1.3bn just the lawyers fees then?

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Replying to farrcorfe:
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By Hugo Fair
05th Feb 2022 12:05

Don't be silly ... the lawyers have to make a profit!

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By paul.benny
05th Feb 2022 14:19

Although some of us may have some schadenfreude over KPMG, this is bad news for all of us - it tarnishes the reputation of our profession and will result in increased regulation and increased costs.

Remember, too, that there are many honest current and former staff at KPMG whose CV will similarly be damaged by association.

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Replying to paul.benny:
RLI
By lionofludesch
05th Feb 2022 18:04

paul.benny wrote:

Remember, too, that there are many honest current and former staff at KPMG whose CV will similarly be damaged by association.

It's probably competence, rather than honesty, which is in question.

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By AndrewV12
15th Feb 2022 13:18

'The Official Receiver is suing KPMG for failing in its role as the auditor of Carillion and is seeking damages of more than £1bn '

Blimey the official receiver has gone from timid [***] cat to man eating lion in a very short space of time, I think we had all better watch out.

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