LONDON--(BUSINESS WIRE)--KPMG is facing a lawsuit worth to up to £1.3 billion over its role as auditor to the Carillion Group, following one of Britain’s biggest insolvencies.
In a legal action undertaken by the Official Receiver, acting as Liquidator on behalf of Carillion’s creditors, it is alleged that KPMG failed in its duties as auditor to spot misstatements in the outsourcing group’s accounts.
Carillion went into compulsory liquidation in January 2018, leaving creditors and shareholders out of pocket, threatening thousands of jobs and forcing the government to step in to ensure the continuation of critical public-sector services, including the delivery of school meals, maintenance of hospitals and management of prisons.
The lawsuit against KPMG will claim damages of more than £1 billion on behalf of creditors – representing the sums Carillion paid out in dividends, advisory fees and losses incurred as the group continued to trade.
Included in the claim are dividends amounting to approximately £210 million, professional fees of approximately £31 million and trading losses of more than £1 billion incurred as the group continued to trade.
Carillion demerged from Tarmac in 1999 and grew quickly, mostly by acquisition. It acquired Mowlem and Alfred McAlpine, among others, and by the 2010s was Britain’s second-largest construction group.
The company was also a major strategic supplier to the UK public sector, with contracts that included building roads and hospitals, providing school meals and managing defence accommodation. Listed on the London Stock Exchange, it was a regular on the FTSE 250 index, and until summer 2017 had a market value consistently above £1 billion.
At the time of its collapse, Carillion held around 450 construction and service contracts across government in the UK, and employed more than 43,000 people, including 18,000 in Britain. Many more people were employed in its extensive supply chains.
Carillion entered into liquidation in January 2018 with £29 million of cash and liabilities of nearly £7 billion. This included a pension liability of around £2.6 billion. Carillion also owed around £2 billion to 30,000 suppliers, sub-contractors and other short-term creditors. During the liquidation, the UK government ensured the continuity of essential services by providing funding to the insolvency.
Carillion’s collapse was sudden and came from a publicly-stated position of strength. In March 2017, the group reported underlying profit from operations of £236m for the 2016 financial year. But in July and September 2017, Carillion announced total write-downs of £1.045bn, a sum equivalent to the previous seven years’ profits combined. The write-downs exceeded the market capitalisation of Carillion and are amongst the largest in UK corporate history.
The legal claim against KPMG
KPMG was Carillion’s auditor for 19 years, earning a total of £29 million for its audit work. Over that period, the firm never qualified its audit opinion.
Peter Meehan, the KPMG partner in charge of the Carillion audit, was suspended by the firm in January 2019, and left KPMG in January 2021.
It is the legal duty of the Official Receiver as Carillion’s liquidator to commence investigations into the affairs of the company to identify the causes of its failure. The Official Receiver also has a duty under the Insolvency Act to realise the company’s assets (including recoveries from litigation) for the benefit of creditors.
The Official Receiver has identified evidence of negligence and breach of duty by KPMG in respect of its role as auditor to Carillion. He has concluded that a successful claim against KPMG is likely to be in the interests of the general body of creditors, and therefore he has a duty to progress the claim.
The investigations to date have focused on KPMG audits in the 2014-16 financial years. Those investigations have concluded that no reasonably competent auditor would have signed unqualified audit opinions on the Carillion group’s 2014-16 financial statements.
A KPMG review in May 2017 concluded that those accounts were sound, yet by July 2017 Carillion had been forced to make an £845 million provision relating to the values of a number of key contracts. This was followed by a further £200 million write-down in September 2017.
The lawsuit against KPMG will claim damages on creditors’ behalf of more than £1 billion and will include dividends paid out by Carillion PLC over the 2014-17 period. Included in the claim are dividends amounting to approximately £210 million, which it is contended would never have been paid if the company’s accounts had been correctly audited and fairly stated. The claim also includes professional fees of approximately £31 million and trading losses of more than £1 billion incurred as the group continued to trade throughout 2017 as a result of KPMG’s negligence.
The focus of the negligence claim is on the value of major long-term construction contracts, which were not properly accounted for in any of the 2014, 2015 or 2016 audits, resulting in misstatements in excess of £800m within Carillion’s financial statements. These include construction projects valued in the tens or hundreds of millions of pounds, including the Royal Liverpool Hospital, the Southmead Hospital redevelopment, the Aberdeen ring road, significant works at Gatwick and Stansted Airports, and other major projects in the UK and overseas.
Despite knowing that there were problems in relation to these contracts and identifying the audit of construction contracts as a significant risk, KPMG accepted management explanations for inflated revenue and understated cost positions. The firm failed to respond to multiple “red flags” which should have alerted them to a clear and obvious risk of misstatement.
The claim cites evidence that KPMG failed to maintain professional independence, and engaged in an improper relationship with management while conducting the audits, in breach of professional and ethical obligations. The claim cites evidence that Peter Meehan repeatedly accepted hospitality from and offered hospitality to Carillion and its senior management, offered assistance to the executive management in getting figures “past” Carillion’s Audit Committee, and backdated KPMG’s audit opinion in respect of certain of Carillion’s accounts.
The legal action on behalf of Carillion’s creditors is led by Matthew Bunting of Quinn Emanuel Urquhart & Sullivan LLP. It has been filed at the Commercial Court of England and Wales, a subdivision of the Queen’s Bench Division of the High Court of Justice. The case number is CL-2021-000679.
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.”