* KPMG missed "red flags" in Carillion audits - lawsuit
* KPMG was "in wholesale breach of obligation as auditor" -
claim
* KPMG says Carillion board, management to blame for failure
* Claim is without merit - KPMG
(Adds details, background)
By Kirstin Ridley
LONDON, Feb 3 (Reuters) - KPMG has been sued for 1.3 billion
pounds ($1.77 billion) by the liquidators of Carillion for
missing "red flags" during audits of the construction giant, in
one of the largest claims against one of the world's top
accountants.
Britain's Official Receiver, part of the Insolvency Service,
which is liquidating the former blue-chip group, alleged that
negligent failures by KPMG to detect misstatements in the
accounts of Carillion - which collapsed in 2018 under 7 billion
pounds of debt - cost claimants "extensive loss and damage".
KPMG said it believed the lawsuit, details of which were
made public on Thursday, was without merit and vowed to defend
the case robustly.
"Responsibility for the failure of Carillion lies solely
with the company's board and management, who set the strategy
and ran the business," a KPMG representative said.
The claim, filed on behalf of creditors, turns on
allegations that Carillion amassed vast trading losses, paid out
about 210 million pounds in dividends between 2014 and 2016 and
almost 39 million pounds in professional fees in 2017, because
it relied on KPMG's audits.
The liquidator alleged KPMG failed to remain independent
from its client and failed to exercise proper professional
scepticism. One audit engagement partner repeatedly accepted
hospitality from and offered hospitality to senior Carillion
management, the lawsuit alleged.
The failure of Carillion, whose projects included schools,
hospitals, prisons and part of a high-speed rail link, plunged
thousands of jobs into uncertainty, threatened major public
sector works and raised fresh questions about the risks of
handing public sector projects to private companies.
The Insolvency Service has applied for eight directors
linked to Carillion to be disqualified and the Financial Conduct
Authority, the market regulator, has proposed handing Carillion
a public censure over "reckless" behaviour.
But high-profile corporate failures in Britain have also
sparked investigations and government-backed reviews to boost
accounting standards in a market dominated by KPMG and its peers
EY, Deloitte and PwC, known as the Big Four, who audit all of
Britain's 100 top blue-chip companies.
Auditors have been lambasted after a string of corporate
failures over two decades, from Arthur Andersen's oversight of
failed U.S. energy giant Enron in 2001 to EY's audits of payment
services group Wirecard, which collapsed in 2020.
Some accountancy experts note that PwC is a special advisor
to the UK Official Receiver and stands to profit from the case
against KPMG - and that headline-grabbing damages claims can
settle out of court for a fraction of their original size.
Jan du Plessis, the chair designate of Britain's FRC - an
agency long criticised for failing to crack down on poor
auditing after corporate collapses such as Carillion, retailer
BHS and cafe chain Patisserie Valerie - said last month it was
time to "jack up" scrutiny.
($1 = 0.7357 pounds)
(Reporting by Kirstin Ridley; Editing by Alex Richardson, Nick
Macfie and David Evans)
Carillion Plc (CLLN)