KPMG’s incompetence in its audits of Carillion played a core part in the construction giant’s 2018 collapse, Carillion’s liquidators have said, as part of a £1.3bn lawsuit against the Big Four accounting firm.
KPMG’s 2016 audit of Carillion lulled the construction firm’s board into a false sense of security that saw the firm make a series of financial decision that plunged Carillion into bankruptcy in 2018, the lawsuit says.
The audits, through which KPMG missed a series of “red flags,” gave Carilion’s board a wrong understanding of the firm’s financial situation that in turn saw it take on unsustainable debts, Carillion’s liquidators said in High Court filings.
The auditor’s “incompetent” work in turn saw Carillion’s board agree to pay out a £210m dividend to shareholders, that would not have been lawful to pay if the true state of Carillion’s accounts had been known, the High Court filings say.
The 2016 audit also saw Carillion pay out millions in professional services fees that would not have been paid out if the audit had been carried out properly, Carillion’s liquidator said.
The allegations come after Carillion’s liquidators sued KPMG for £1.3bn in February over claims the auditor’s incompetence contributed directly to the construction firm’s collapse.
KPMG received £29m in fees for its audits of Carillion over a 19-year period, before the construction firm collapsed in 2018, causing 3,000 job losses and leaving £7bn worth of debts.
Carillion’s liquidators are now seeking to recover £1.3bn worth of losses from KPMG, in claiming the firm breached its duties as an auditor in failing to detect or report financial misstatements in Carillion’s accounts.
The liquidators claim KPMG accepted “management representations” at face value, without collecting sufficient audit evidence and without “exercising proper professional scepticism,” in a situation that saw the auditor miss multiple “red flags,” Carillion’s liquidators said in their initial High Court claim.
The liquidators claimed KPMG’s audit engagement partner, Peter Meehan, failed to maintain his independence, in repeatedly accepting hospitality from Carillion’s senior management and failing to respect the proper boundaries of the client/ auditor relationship.
In July, the UK’s Financial Reporting Council (FRC) fined KPMG £14.4m for misleading the regulator during reviews of its audits of Carillion and Regenersis.
The accounting watchdog also fined Meehan £250,000 over his part in the audit scandal, and fined three other ex-KPMG employees sums of between £30,000-45,000.
A KPMG UK spokesperson said: “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.”