KPMG is being sued for £1.3bn by government officials liquidating the collapsed contractor Carillion, in an unprecedented legal action against one of the big four auditors. Carillion’ collapsed in January 2018 with £7bn in debts, resulting in 3,000 job losses and chaos across government and private-sector construction projects ranging from hospitals, schools, roads and even work on Liverpool football club’s stadium, Anfield. The scandal has also directed intense scrutiny towards the role of auditors, including those at KPMG who produced unqualified audit opinions even as the risks built up on Carillion’s balance sheet. Several failures and many subsequent inquiries have prompted the government to overhaul British audit regulations. The £1.3bn high court claim for audit negligence includes dividends worth £210m Carillion paid out that would not have been justifiable had auditors flagged the true extent of its financial peril, plus trading losses of nearly £1.1bn incurred as the group wrongly continued to trade when it should have been declared insolvent, according to “particulars of claim” – the details of the case – filed by the official receiver’s lawyers. KPMG received £29m for its audit work for Carillion over the course of 19 years without ever qualifying its opinion. Accountants can qualify audit opinions – inserting caveats that warn of concerns – if they find a serious issue with company disclosures. “The precise reasons for KPMG’s failings are unclear, pending further disclosure,” said the claimants, but argued that the accountancy firm failed to maintain its independence from Carillion. In particular, the then lead audit partner Peter Meehan “repeatedly accepted hospitality from and offered hospitality to Carillion and its senior management, failed to respect the proper boundaries of the auditor/client relationship, [and] offered assistance to the executive management in getting figures ‘past’ the audit committee”. Meehan is also accused of backdating an audit opinion on a Carillion construction subsidiary. The UK’s official receiver, a government official, has brought the action as part of its duty to try to maximise returns for creditors. A spokesperson for the receiver said: “Following extensive investigations looking into the causes of Carillion’s liquidation, the official receiver has submitted a claim to the high court concerning KPMG’s role as auditor for the company’s accounts. “The official receiver has taken this action in the interests of creditors who lost substantially in the liquidation. The decision is based on legal advice, which is that KPMG is answerable to Carillion’s creditors for losses that have been caused.” Losing the case could present financial liabilities to KPMG that vastly overshadow fines levied related to previous accounting scandals. It was fined £3m in January for failures during its audit of the Bargain Booze owner Conviviality, and last year it received a near-record fine of £13m related to the sale of bed maker Silentnight. Aside from the scandals, KPMG has reported booming trade in recent months, led by a surge in fees from advising on company mergers and acquisitions. The average distribution to UK partners increased by 20% from £572,000 in 2020 to £688,000 for 2021. The accountancy firm is in the unusual position of having already admitted that misconduct occurred in relation to the Carillion audit. Last month, KPMG UK’s chief executive, Jon Holt, said it was “clear” that misconduct had occurred and apologised after the Financial Reporting Council, the accounting regulator, accused five former KPMG auditors of misconduct. The tribunal has heard weeks of evidence including allegations that the five former auditors at KPMG including Meehan were involved in forging documents sent to the regulator shortly before Carillion’s collapse to cover up gaps in the audit. During the tribunal KPMG has sought consistently to differentiate between the audit itself and the alleged misconduct that followed. It has not admitted any failings related directly to the audit. The firm is expected to argue that the official receiver is trying to use it effectively as an insurance policy to cover the losses from an ill-conceived company strategy that was the sole responsibility of Carillion’s board. Eight former Carillion directors are facing legal action from the Insolvency Service to prevent them from serving as directors. They are contesting the action. A KPMG UK spokesperson said: “We believe this claim is without merit and we will robustly defend the case. Responsibility for the failure of Carillion lies solely with the company’s board and management, who set the strategy and ran the business.” Meehan was approached for comment via his lawyer.