Carillion has accelerated its efforts to bring a civil lawsuit against KPMG, preparing to mount a negligence claim over previous audits and sue the accountancy giant for £250m.
According to the Financial Times, liquidators for the collapsed construction group are actively seeking a court order to obtain documents pertaining to the audits carried out between 2014 and 2016.
Following the audits, a civil servant who oversaw the liquidation of Carillion has now claimed that the outsourcer’s board of directors believed the business was “profitable and sustainable” as a result of KPMG’s audit results.
As a result of opinions arising from the series of audits, Carillion directors proceeded to pay out almost £250m in dividends and advisory fees over a two-year period.
The claim was made public today (12 May) following the submission of a court application to gain access to KPMG’s audit documents.
KPMG has reportedly rejected the application for these documents, according to the Financial Times. However, a court filing by lawyers for the civil servant argued that these files would be “core evidence” going forward.
The filing said: “KPMG’s breaches of contract and duty caused [Carillion] to incur losses which it would not have done if it had been aware of its true financial position.”
According to the lawyers, KPMG could be liable for £234.2m in dividends that were paid out to the construction group’s shareholders between 2014 and 2016. In addition, it may also be liable for £17m in advisers’ fees.
The filing notes that such fees “would not have been paid if the misstatements in the financial statements had been detected by KPMG”.
The proposed claim alleges that misstatements in the accounting of revenue and liabilities of contracts went undetected by the accountancy firm, who was “negligent in its accounting for goodwill”.
This will mark the first time that a large audit firm could be taken to court in an effort to receive compensation from a major insolvency.
The construction giant had initially issued a profit warning four months after KPMG signed off on its accounts in 2017, and collapsed only five months later in January 2018. The outsourcing group owed more than £1.3bn to its banks and had a pension deficit of £800m.
A later parliamentary inquiry into the collapse of the firm claimed that KPMG was “complicit” in its collapse, having “missed warning signs in its financial statements in relation to contract revenue and goodwill”.
The Financial Reporting Council (FRC) first announced it would investigate KPMG’s audit of the financial statements of Carillion in January 2018. Statements for the years ended 31 December 2014, 2015 and 2016, as well as additional audit work in 2017, were all investigated by the council.
However, the council confirmed that the first stage of its investigation will now be completed by summer 2020, rather than by January 2020. It alleged it requires more time to investigate the collapse of the construction services company due to the “complexity” of the case.
