Big Four firm KPMG LLP missed multiple red flags when it audited the financial statements of Carillion PLC, the liquidators of the defunct construction and outsourcing firm said.
U.K. government officials sued KPMG seeking in January £1.3 billion—equivalent to around $1.55 billion—and claiming the audit firm failed to spot misstatements that would have led the company’s management to take different actions. Dividends worth roughly £210 million and paid out over the course of three years shouldn’t have been made had the auditor flagged the true state of Carillion’s financials, the filings in a commercial civil court in London said. The company additionally incurred nearly £1.1 billion in losses as it continued to trade after it should have been deemed insolvent, according to the filings which were made public late last week.
KPMG received £29 million from Carillion without qualifying its audit opinions over the course of 19 years, according to the liquidators. Qualified opinions indicate that auditors have found issues in a company’s financials.
Carillion’s liquidators in court filings Friday said that KPMG has yet to address claims that it failed to properly audit the accounting of 20 construction contracts. Carillion says the value of two contracts alone in the year ended in 2016 was misstated by nearly £352 million and that had KPMG acted as a reasonably competent auditor, it would have detected the misstatements.
The construction company’s liquidators also reject KPMG’s argument that the value of the construction contracts was concealed. This would have “required all relevant personnel in the project teams, business units and senior management to engage in a widespread and concerted fraud on the Group’s auditors, which they would not have done,” the liquidators said, adding that a reasonably competent auditor wouldn’t have allowed Carillion to withhold relevant documents.
The latest filings additionally point to a £14.4 million fine announced by the U.K.’s audit and accounting regulator in July. The Financial Reporting Council imposed the fine for KPMG’s failings related to the audits of Carillion in 2016 and
PLC in 2014. Regenersis is a data-security company that has been renamed Blancco Technology Group PLC. Four of the accounting firm’s former employees were fined and banned from the auditing profession for varying numbers of years. A fifth was “severely reprimanded,” the FRC said.
Peter Meehan, a former KPMG partner who was responsible for the fiscal 2016 Carillion audit, received the most severe penalty, with a ban of 10 years from auditing and a £250,000 fine. Mr. Meehan’s representatives didn’t respond to a request for comment.
The Carillion liquidators will rely at trial on findings from the FRC’s investigation, the filings show. “KPMG has failed to respond to material aspects of Carillion’s case,” a Carillion spokesman said.
The allegations are without merit, a KPMG spokesman said in a statement. “Responsibility for the failure of Carillion lies solely with the company’s board and management, who set the strategy and ran the business,” he added.
KPMG in a July court filing denied that it was negligent when signing off on Carillion’s financials. There were no red flags the firm could have identified given that the company’s management allowed relevant audit information to be concealed or did so itself, KPMG said.
If there is no settlement between the liquidators and the audit firm, the case against KPMG could go to trial in or around 2024.
Write to Jennifer Williams-Alvarez at email@example.com
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