Ontario Construction News staff writer
The official receiver for bankrupt British multinational contractor Carillion is suing KPMG for £1.3 billion ($2.247 billion in Canadian funds).
The receiver asserts the auditor failed its duties to spot misstatements in the group’s accounts before the contractor – which had several significant projects under-way in Canada – collapsed in January, 2018.
When it failed, Carillion owed £7 creditors billion, including around £2 billion to 30,000 suppliers and subcontractors.
UK-based Construction Enquirer reports that the receiver will claim damages of more than £1 billion on behalf of creditors. This sum reflects the £31 million Carillion paid out in advisory fees, £210 million in dividends and operating losses of more than £1 billion as the contractor continued in business after the receiver asserted that KPMG should have flagged the company’s impending insolvency.
“In March 2017, the group reported an underlying profit from operations of £236 million for the 2016 financial year,” the published report says. “But in July and September 2017, Carillion announced total write downs of £104.5 billion, a sum equivalent of the previous seven years combined.”
These losses wiped out all of the company’s market capitalization, representing one of the largest insolvencies in UK corporate history – causing serious and massive claims for surety/bonding companies as they picked up the pieces for projects in Britain, Canada and elsewhere in the world.
“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 £800 million within Carillion’s financial statements,” Construction Enquirer reported.
KPMG allegedly accepted management explanations for inflated revenues and understated cost positions even though the auditors knew there were problems in relation to the contracts and should have identified them as a significant risk.
“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 account,” a spokesperson for the Official Receiver said.
(In the UK, the Official Receiver is a civil servant within the country’s government-managed Insolvency Service).
“The Official receiver has taken this action in the interest 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.”
Construction Enquirer quoted as KPMG UK spokesperson as saying: “We believe this claim is without merit and we will robustly defend the case. Responsibility for the failure of Carillion lies solely with the company’s board and management, who set the strategy and ran the business.”
Before its insolvency, the construction firm was one of the largest in the UK, with an estimated 50,000 employees world-wide including about 6,000 in Canada.
Canadian projects under-way when the company went insolvent included road building work in Alberta and Ontario, as well as construction of hospitals and mental health facilities in Ontario, Saskatchewan, the Northwest Territories and Nunavut.