Collapsed British construction giant Carillion PLC lost a bid to get access to KPMG audit workpapers in preparation for a £250 million ($314 million) lawsuit against the accounting firm for negligence.
The failed construction company, which entered into liquidation in 2018, is seeking to sue KPMG LLP and KPMG Audit LLC for audits carried out on the company’s books from 2014 to 2016. In particular, lawmakers are questioning KPGM signing off on company books in 2017, shortly before the company’s insolvency. Carillion liquidators accuse KPMG’s audits of leading the Carillion board of directors to believe the firm was profitable. KPMG denies negligence and has stated that the company’s work was appropriate.
London judge Richard Jacobs dismissed Carillion’s application for access to documents, concluding that the bid goes beyond the normal requests for key documents before a suit is filed. The judge said that the disclosure would be expensive and substantial, and should be produced at a later time.
Carillion looked to the courts after KPMG refused to hand over its workpapers. Carillion’s suit focuses on KPMG’s audit of revenue and liabilities under construction contracts and on goodwill. The working papers, Carillion says, will help experts evaluate whether KPMG is responsible for misstatements in the accounts.
Carillion is seeking £234.2 million in dividends from 2014 to 2016, as well as an additional £16.8 million it paid to KPMG for advisory fees in 2017, but it has stated it needs access to the workpapers to fully quantify its losses. KPMG says that the documents Carillion applied for are too broad and would impose a burden on the accounting firm that will disfavor it in the upcoming lawsuit.
The Financial Reporting Council (FRC) is also investigating the company’s collapse and the vetting of accounts by KPMG from 2014-2016, as well as additional audits done in 2017, with results set to come out later this year.
The collapse of Carillion had brought criticism of the audit industry when the Big Four—KPMG, Deloitte, EY, and PwC—were accused of “feasting on carcasses” by U.K. lawmakers, as they had all billed Carillion for audit work. Following a string of high-profile collapses such as Carillion’s, the FRC warned accounting and audit companies in early May to get better at identifying poor quality audits to avoid misleading shareholders and members of the public. In its first audit quality report, the FRC found that the biggest accounting firms in the United Kingdom do not run quality checks on company accounts before or during the auditing process, only reviewing the final report. 
Stephanie Liu is assistant editor at Internal Audit 360°