What just happened?
KPMG, one of the Big 4 accounting firms has been facing heat during the past few weeks over allegations of being negligent on the Carillion group’s accounts. The claim has been brought forward by liquidators working for the United Kingdoms (“UK”) Government, making this is the first time that such a claim has been made in this country.
What does this mean?
Carillion, which employs over 19,000 workers in the UK, had several Government contracts including the construction of the HS2 rail line[1], issued a profit warning four months after KPMG signed off on its accounts. The group subsequently crashed five months later in 2018. Carillion is said to owe more than € 1.5 billion to its banks which sat against 420 UK public sector contracts which the group was involved in at the time of bankruptcy. [2]
In the submitted legal documents, Carillion believed that it held a profitable and sustainable business due to the accounts given to them by KPMG. Further, it was stated that KPMG may face liability of € 234.2 million in dividends that were paid out to the Carillion’s shareholders as wells as advisers fee €17 million “which would not have been paid if the misstatements in the financial statements had been detected by KPMG[3]”. Hence, the suit was filed. Interestingly, KPMG responded that this suit was ‘unusual and ‘unnecessary’
How does this affect the legal industry?
A distinguishing feature of this suit is that it addresses a potential issue for professionals such as lawyers, accountants and auditors, that is, despite implementing and following established protocol on routine projects; there is a probability that it would not be sufficient. This begs the question; how does one decipher the efficacy of the standard and established protocol since it has worked well in the past?
In the coming months, this battle of he said she said, can only lead to one conclusion, someone is at fault. It was stated that Carillion’s liquidators should rely on the company’s documents. This would definitely be essential in order to identify material misstatements in Carillion’s accounts. This would help relieve the liability of negligence on part of KPMG’s auditing. In fact, KPMG in 2017 alerted Carillion that the company was a going concern in its interim results, despite Carillion making large write-downs.[4]
This negligence suit is definitely not the first time that somebody has accused a firm of being negligent and overlooking crucial matters, in fact in the RBS-AMRO case, similar allegations were made but such discussion are overlooked, if a firm employs a reasonable degree of care and follows established protocols when handling matters. In the matter of RBS-AMRO, the acquisition of the Dutch bank was done during mercurial financial times, the Global Recession of 2008. This could lend an explanation as to why the acquisition lead to disastrous results[5]. However, one of the crucial points brought forward after the RBS-AMRO matter was that regulators such as the Financial Services Authority (“FSA”) and other such regulatory bodies must be empowered to oversee any activities that could affect the public and has a higher monetary estimate[6]. This could help in mitigating any crisis that could arise out of such deals and contracts. LawMiracle, believes that the role of regulators ought to be made bigger and less ornamentary in nature. Firms might see this as an added obstacle in completion of their deals, but this would serve as the best way to prevent another financial crisis from happening and could prevent firms from facing negligence suits as well.
However, much like in the case of RBS, KPMG has stated that it had carried out the established due diligence and conducted the audit according to industry practices. It therefore, becomes difficult to pinpoint the blame on just one party in these circumstances. Here at LawMiracle, we believe that it all boils down to market circumstances and general political climate surrounding the matter. This might sound simplistic but this is the only plausible explanation for the small percentage of cases that end up in dispute. The Financial Reporting Council will release its inquiry report in the coming weeks. It is then we can truly ascertain if KPMG was liable for negligence. Here at LawMiracle, believe at this moment in time, there does not seem to be a case of negligence, however this is all dependent on how the trial will progress. This case will be crucial in identifying the extent to which firms can rely on following established protocols and further, it could give a glimpse on how to determine when there is an actual case of negligence.
This suit is still in its nascent stage and the court is yet to hear any of the arguments. The decision made by this court could help in framing better rules for regulatory bodies so as to prevent future mishaps and could assist firms in establishing better due diligence protocols.
Written by Shika Nadig
Assessing Firms
#Allen&Overy #CliffordChance #Linklaters #White&Case #Slaughter&May #Dentons
References:
[1] Tabby Kinder, ‘KPMG Faces Lawsuit over Carillion Audit’, Financial Times (London, 4 August 2019) < https://www.ft.com/content/277dfdce-b6ec-11e9-96bd-8e884d3ea203> Accessed on 30 May 2020
[2] Rob Horgan, ‘Carillion Auditor KPMG Faces € 250 million Negligence Suit’ ( 15 May 2020) <https://www.newcivilengineer.com/latest/carillion-auditor-kpmg-faces-250m-negligence-lawsuit-15-05-2020/> Accessed on 30 May 2020
[3] A statement made by the Carillion group.
[4] Tabby Kinder, ‘KPMG Faces € 250 million Negligence Lawsuit over Carillion’ (London, 12 May 2020) <https://www.ft.com/content/3b10ca83-7818-46d5-b492-8c86857ebd33> Accessed on 30 May 2020
[5] Financial Services Authority, ‘The Failure of the Royal Bank of Scotland’ (December 2011), pgs 159-188 <https://www.fca.org.uk/publication/corporate/fsa-rbs.pdf> Accessed on 4 June 2020
[6] Financial Services Authority, ‘The Failure of the Royal Bank of Scotland’ (December 2011), pgs 253-295, 303 <https://www.fca.org.uk/publication/corporate/fsa-rbs.pdf> Accessed on 4 June 2020
Disclaimer: This article (and any information accessed through links in this article) is provided for information purposes only and does not constitute legal advice.