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KPMG failing to spot "red flags"

For failing to spot "red flags" during its audits of the construction company Carillion, KPMG is facing a 1.3 billion pound (U.S. $1.8 billion) lawsuit. Carillion's creditors claim the company was insolvent for more than two years before it collapsed.

The claim—which KPMG intends to defend and says is “without merit”—alleges the audit firm failed in its duties as auditor to spot misstatements in the outsourcing group’s accounts.


The value of major long-term construction contracts that were not properly accounted for in 2014, 2015, or 2016 audits is the focus of the negligence claim, which was made public on Thursday. The misstatements totaled more than £800 million (U.S. $1.1 billion) as a result of the negligence claim.


Carillion was placed into compulsory liquidation in January 2018 and quickly rose to become one of the country's largest bankruptcies. Until the summer of 2017, it had a market capitalization of more than £1 billion (US $1.4 billion) and was the country's second-largest construction group by revenue.


According to the liquidators, KPMG accepted management's explanations for inflated revenue and understated cost positions and accepted them as fact.


Responding to the failure of Carillion, KPMG stated, "The sole responsibility for Carillion's failure lies with the company's board of directors and management, who defined its strategy and ran its business.”

As evidenced by the claim, the accounting firm KPMG failed to maintain professional independence and engaged in an improper relationship with Carillion management, which resulted in a violation of professional audit and ethical obligations.

Specifically, it claims that Peter Meehan, the KPMG partner in charge of the Carillion audit, accepted and offered hospitality to Carillion and its senior management, as well as assisting executive management in getting figures past Carillion's audit committee, among other things.


He is also suspected of having backdated KPMG's audit opinions to certain of the company's financial statements.


Meehan was fired from KPMG in January 2019 and was no longer employed by the company by January 2021.


KPMG served as Carillion's auditor for 19 years, earning a total of £29 million (approximately $39 million) in compensation for its services. During that time period, the firm never issued a qualified audit opinion. According to Carillion's liquidators, the company was "balance sheet insolvent" by the end of the 2016 fiscal year.


Carillion's official receiver, who is a member of the United Kingdom Insolvency Service and acts on behalf of the company's creditors, said in a statement that he has filed a claim with the High Court "in the interests of creditors who have suffered significantly as a result of the liquidation." Moreover, the receiver stated that "KPMG is responsible to Carillion's creditors for a portion of their losses."

The damages claim includes dividends paid out to shareholders totaling approximately £210 million (US $284 million), professional advisory fees totaling £31 million (US $42 million), and trading losses totaling more than £1 billion (US $2 billion).

Since the Supreme Court rewrote the rules for professional negligence, and thus increased the amount of money that can be awarded, the amount being sought is more than five times what the liquidators were originally planning to sue KPMG for in May 2020: £250 million (about $339 million).


Among other things, it has sparked a debate about the role and responsibilities of auditors in detecting fraud, as well as a discussion about why it has historically been difficult to hold audit firms, as well as corporate executives (individually or collectively), accountable for corporate failure.


A separate legal action brought by the Insolvency Service against eight former Carillion directors seeks to bar them from holding directorships. The directors have denied any wrongdoing and are defending the action. The trial is scheduled to take place in 2023.


The Financial Reporting Council, the United Kingdom's corporate governance regulator, is currently looking into the audits of Carillion performed by KPMG.

By fLEXI tEAM






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