KPMG has been sued for £1.3billion by Carillion liquidators, who say the auditor missed ‘red flags’ that the UK contractor’s accounts were wrong and the group was insolvent more than two years before its collapse.
Liquidators say Carillion could have avoided a £1.1bn deterioration in its cash position between December 2016 and its implosion in January 2018 had KPMG identified the sub-contractor as insolvent at the start of the period, according to a copy of the claim seen by the Financial Times.
The complaint to the High Court was brought by a government insolvency service official, who hired PwC to handle the liquidation of the sub-contractor and recover the money for its creditors.
Carillion had liabilities of £7billion and just £29million in cash when it went into liquidation, putting thousands of jobs at risk and jeopardizing the provision of school meals and hospital cleaning.
The company’s failure fueled calls for an overhaul of auditing and corporate governance rules in the UK and prompted an MP to say he would not hire KPMG to audit “the content of my refrigerator.
The claim, which KPMG has announced it will defend, also seeks damages to cover £210 million in dividends paid to Carillion shareholders between 2014 and 2016.
Earlier court documents showed the claim was to be in the region of £250million. Industry folks say, however, that recent court judgments have redefined the standard for professional negligence, potentially increasing the losses that can be claimed from auditors.
The liquidators allege that KPMG failed to remain independent of Carillion management and that audit partner Peter Meehan “repeatedly accepted and offered hospitality to Carillion and its senior management” and “did not not respected the appropriate boundaries of the auditor-client relationship”.
Meehan helped management pass the figures to the audit committee and backdated its audit opinion on Carillion Construction Limited for 2016, according to the claim.
He also recommended a Carillion employee for a job with another contractor and introduced the company to a “former colleague” about a possible business acquisition, it is alleged. Meehan’s attorneys did not immediately respond to a request for comment.
Carillion’s net assets “were overstated by hundreds of millions of pounds” and it was “insolvent on the balance sheet” at the end of 2016, the claim added.
The financial statements failed to properly account for goodwill or revenues and costs under long-term construction contracts, it is alleged.
“Any reasonably competent auditor would have detected and reported these misstatements and related disclosure deficiencies,” according to the assertion.
KPMG also failed to notice that the inaccuracies “appeared to be the result of deliberate manipulation” of the accounts by Carillion executives Richard Adam and Zafar Khan, according to the liquidator. Adam and Khan did not immediately respond to requests for comment.
In a statement, KPMG said that “we believe this claim is without merit and we will vigorously defend the case. Responsibility for Carillion’s failure rests solely with the company’s board of directors and management, who defined the strategy and led the company.
Eight former Carillion directors, including Adam and Khan, have denied any wrongdoing and are defending a separate legal action brought by the Insolvency Service, which seeks to bar them from running other UK companies. The trial is scheduled for 2023.
According to the liquidators, “the picture presented by the financial statements was that of profitable companies, with substantial net assets”. But in reality, Carillion’s financial situation “was nothing like the reported results and the financial statements were seriously misleading.”
The government contractor had announced more than £1bn in write-downs in 2017, months after KPMG gave unqualified audit opinions on the accounts.
In accounts published this week, the Big Four company increased its provision for possible legal payments and regulatory fines from £92million to £144million.
KPMG boss Jon Holt apologized in January, saying the firm misled the UK accounting regulator during an inspection of the audit of Carillion’s 2016 accounts. Members of KPMG’s Carillion audit team, including Meehan, have denied wrongdoing and blamed each other in a court set to resume next week.
The Financial Reporting Council is separately investigating possible deficiencies in Carillion’s audits.
KPMG’s UK partners received an average of £688,000 last year, their biggest payout since 2014, despite scandals that prompted it to pull out of tenders for government contracts.