The Official Receiver, acting as liquidator on behalf of Carillion’s creditors, alleges that KPMG failed in its duties as auditor to spot misstatements in Carillion’s accounts in the run-up to its January 2018 collapse.
The lawsuit against KPMG will claim damages of more than £1bn 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 £210m, professional fees of approximately £31m and trading losses of more than £1bn incurred as the company continued to trade.
Carillion went into liquidation with £29m of cash and liabilities of nearly £7bn. This included a pension liability of around £2.6bn. Carillion also owed around £2bn to 30,000 suppliers, subcontractors and other short-term creditors.
In March 2017, Carillion 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.
KPMG was Carillion’s auditor for 19 years, earning a total of £29m for its audit work. Over that period, the firm never qualified its audit opinion.
The Official Receiver, as Carillion’s liquidator, is obliged to investigate the causes of the company’s failure. It also has a duty under the Insolvency Act to realise the company’s assets for the benefit of creditors.
Investigations to date have focused on KPMG audits in the 2014-16 financial years, and concluded that no reasonably competent auditor would have signed unqualified audit opinions.
A KPMG review in May 2017 concluded that those accounts were sound, yet by July 2017 Carillion had been forced to make an £845m 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 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 the Royal Liverpool Hospital, the Southmead Hospital redevelopment, the Aberdeen ring road, 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 Official Receiver says.
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.
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.”