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KPMG has accused the management of collapsed UK outsourcer Carillion of concealing information from its auditors and of doctoring financial documents provided to the firm to make them more “audit friendly”.

The Big Four firm denied it was responsible for £1.3bn of losses claimed from it in a negligence action by liquidators for Carillion, which collapsed in 2018.

The lawsuit, launched in February, alleged that KPMG auditors had missed “red flags” that the company’s accounts were misstated and that the group was insolvent more than two years before it fell into liquidation.

In its defence filed at the High Court in London on Thursday, KPMG said the liquidators had so far failed to prove that Carillion’s accounts were misstated. It also alleged that the losses claimed in the lawsuit were caused by operational problems at the company and a failure by its executive and non-executive directors to carry out their duties.

KPMG said that the outsourcer’s management had failed to comply with its duties in the preparation of financial statements and had not provided accurate and complete information to the auditors.

Carillion had liabilities of £7bn and just £29mn in cash when it went into liquidation, fuelling calls for an overhaul of UK audit and corporate governance rules and prompting an MP to say he would not hire KPMG to audit “the contents of my fridge”.

Carillion announced writedowns of more than £1bn in 2017, months after KPMG gave an unqualified audit opinion on its accounts.

The liquidation is being run by PwC on behalf of the Official Receiver, part of the UK government’s Insolvency Service.

In its defence, KPMG said some of Carillion’s management had caused, approved or acquiesced in the concealment of relevant information from its auditors and in the production of deliberately false and misleading financial statements.

Auditors were provided with “adjusted” versions of papers setting out how the group’s contracts were performing, while documents disclosing contrary positions were either withheld from KPMG or changed by Carillion’s personnel to make them more “audit friendly”, according to KPMG’s defence, citing internal Carillion emails.

In an email in 2014, a finance director of a Carillion subsidiary had referred to a document to be provided to KPMG as the “magical adjustment version”, according to the firm’s defence.

KPMG denied it had breached its duties but said even if it had done so, this was not the cause of the losses claimed by Carillion’s liquidator.

The firm should therefore not be liable for the liquidators’ claims for £1.1bn in trading losses, £210mn in dividends paid to Carillion’s shareholders between 2014 and 2016, and £31mn of professional advisers’ fees, it said.

It also disputed the liquidators’ claim that management would have halted non-essential spending if KPMG had reported that Carillion’s accounts were misstated.

This would also have “destroyed value” in the company’s contracts and made it harder to win new work, hastening the insolvency of the company, KPMG said. The liquidators’ claim that Carillion’s board would have placed the group in liquidation much earlier if it had known the group’s true financial state was “not credible”, KPMG added.

Carillion’s collapse has led to a series of regulatory and legal actions. The Financial Conduct Authority this week provisionally fined three former Carillion directors, including former chief executive Richard Howson, a total of £870,000 for “recklessly” publishing misleading statements about the outsourcing group’s finances before its collapse. The three executives are appealing against the penalties.

The three are among eight former directors who are defending a separate legal action brought by the government seeking to disqualify them from running UK companies.

KPMG’s audits of Carillion remain under investigation by the accounting regulator. It was ordered to pay a £14.4mn fine after an industry tribunal found that its auditors had deliberately misled regulators inspecting its audit of Carillion’s 2016 accounts. Members of KPMG’s Carillion audit team, including former partner Peter Meehan, were also fined and handed lengthy bans from the profession.

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