KPMG is being sued over their audit of Carillion. This seems to be the accounting scandal that won’t die. It seems like this accounting scandal has been going on for forever. KPMG signed off on Carillion’s financials in 2017. Five months later Carillion went out of business.
The government agency in charge of reviewing the Carillion bankruptcy is suing KPMG for 250 million pounds. Their reasoning for the amount is that the company paid out 250 million pounds in dividends between 2014 and 2016 because they relied on the financial statements. KPMG said those financial statements were materially correct. It turns out that the way the company accounted for contracts and goodwill was incorrect. KPMG should have been able to spot these incorrect methods. The accounting methods used by Carillion were labeled as aggressive and that is why KPMG is being held to a higher standard. They should have pushed back on the aggressive accounting and found out how much the company was really worth.
As part of the lawsuit, officials will be looking through KPMG’s audit work. KPMG said that this highly unusual and that they should only look through the company’s internal documents. This isn’t a good sign for KPMG. This isn’t a good sign for any accounting firm. It is easy to tear apart an accounting firms workpapers because most of the time they are just recalculating math that a system performs. If KPMG is unable to show that they performed sufficient work over the accounting principles used by Carillion, then they will be in big trouble. I’m not sure it makes sense for KPMG to be on the hook for 250 million. The company has to be responsible for some of this. It seems that they had no oversight themselves.
The bankruptcy of the company will cost taxpayers in the Uk over 100 million pounds including 50 million pounds owed to PwC for the work they did during the liquidation. The company went bankrupt while owing banks 1.3 billion pounds and having a 800 million pension deficit. They only had 29 million pounds in cash. I always say that cash is king. If you want to find out the truth about a company, track the cash. If they are doing well, they should have plenty of cash. If they aren’t holding much cash, then there better be a really good reason.
The Financial Reporting Council will also publish a report on their findings regarding the KPMG audit in the summer of 2020.
I doubt KPMG will be liable for the 250 million pounds unless the UK wants KPMG to go bankrupt as well. KPMG can’t afford to pay millions of dollars to anyone at this point.