KPMG settles with Carillion liquidators over £1.3bn audit negligence claim

KPMG’s UK business has reached a settlement with the liquidators of Carillion, ending a £1.3bn legal claim against the firm over alleged negligence in its audits of the collapsed outsourcer.

In a High Court lawsuit launched last year, the liquidators claimed that Carillion had been insolvent more than two years before it collapsed in January 2018 and the auditor had missed “red flags” resulting in the group’s accounts being misstated.

The settlement deal was confirmed by both sides on Friday but its terms were not disclosed.

In its UK accounts for the financial year ending in September 2022, published this month, KPMG made a provision of £179mn to cover the cost of future fines and legal claims.

The figure had risen from £92mn two years earlier despite the conclusion of several regulatory investigations since 2020.

Professional negligence cases against auditors are frequently settled for a fraction of the headline sum claimed. Part of any payout could also be covered by insurance.

Jon Holt, KPMG’s UK chief executive, said: “I am pleased that we have been able to resolve this claim. Carillion was an extreme and serious corporate failure, and it is important that we all learn the lessons from its collapse.”

Carillion had liabilities of £7bn and just £29mn in cash when it went into liquidation, fuelling calls for an overhaul of UK audit and corporate governance rules and prompting an MP to say he would not hire KPMG to audit “the contents of my fridge”.

The government contractor had announced more than £1bn of writedowns in 2017, months after KPMG gave an unqualified audit opinion on its accounts.

The £1.3bn claim was brought by an official of the government’s Insolvency Service, which has hired PwC to run the winding-up of the outsourcer and recover money for its creditors.

KPMG had previously said it would “robustly defend” the legal claim and said that “responsibility for the failure of Carillion lies solely with the company’s board and management, who set the strategy and ran the business”.

The settlement of the case potentially paves the way for KPMG to reach a separate settlement with the UK accounting regulator, which is investigating the firm’s work at Carillion. KPMG was paid £29mn over 19 years to audit the company.

Holt said the Financial Reporting Council investigation was “an important part” of the process to learn from Carillion’s collapse, adding that the firm would continue to co-operate with the watchdog.

KPMG has already paid a record £14.4mn fine after an industry tribunal concluded last year that several of its auditors, including Carillion audit partner Peter Meehan, had deliberately misled the regulator during inspections of its work.