By Kirstin Ridley
LONDON (Reuters) -KPMG has been sued for 1.3 billion pounds ($1.77 billion) by the liquidators of Carillion for missing “red flags” during audits of the construction giant, in one of the largest claims against one of the world’s top accountants.
Britain’s Official Receiver, part of the Insolvency Service, which is liquidating the former blue-chip group, alleged that negligent failures by KPMG to detect misstatements in the accounts of Carillion – which collapsed in 2018 under 7 billion pounds of debt – cost claimants “extensive loss and damage”.
KPMG said it believed the lawsuit, details of which were made public on Thursday, was without merit and vowed to defend the case robustly.
“Responsibility for the failure of Carillion lies solely with the company’s board and management, who set the strategy and ran the business,” a KPMG representative said.
The claim, filed on behalf of creditors, turns on allegations that Carillion amassed vast trading losses, paid out about 210 million pounds in dividends between 2014 and 2016 and almost 39 million pounds in professional fees in 2017, because it relied on KPMG’s audits.
The liquidator alleged KPMG failed to remain independent from its client and failed to exercise proper professional scepticism. One audit engagement partner repeatedly accepted hospitality from and offered hospitality to senior Carillion management, the lawsuit alleged.
The failure of Carillion, whose projects included schools, hospitals, prisons and part of a high-speed rail link, plunged thousands of jobs into uncertainty, threatened major public sector works and raised fresh questions about the risks of handing public sector projects to private companies.
The Insolvency Service has applied for eight directors linked to Carillion to be disqualified and the Financial Conduct Authority, the market regulator, has proposed handing Carillion a public censure over “reckless” behaviour.
But high-profile corporate failures in Britain have also sparked investigations and government-backed reviews to boost accounting standards in a market dominated by KPMG and its peers EY, Deloitte and PwC, known as the Big Four, who audit all of Britain’s 100 top blue-chip companies.
Auditors have been lambasted after a string of corporate failures over two decades, from Arthur Andersen’s oversight of failed U.S. energy giant Enron in 2001 to EY’s audits of payment services group Wirecard, which collapsed in 2020.
Some accountancy experts note that PwC is a special advisor to the UK Official Receiver and stands to profit from the case against KPMG – and that headline-grabbing damages claims can settle out of court for a fraction of their original size.
Jan du Plessis, the chair designate of Britain’s FRC – an agency long criticised for failing to crack down on poor auditing after corporate collapses such as Carillion, retailer BHS and cafe chain Patisserie Valerie – said last month it was time to “jack up” scrutiny.
($1 = 0.7357 pounds)
(Reporting by Kirstin Ridley; Editing by Alex Richardson, Nick Macfie and David Evans)