On the one hand, the oil and gas services company claims KPMG did not properly carry out its statutory duties and negligently flagged non-issues, while on the other, KPMG asserts the issues were genuine and that it did its job by highlighting them to the regulators.
This is not the first time that a company has clashed with its auditor and gone to court to settle its disputes. FMT takes a look back at previous high-profile court cases involving companies and their auditors.
PWC and Tyco International shareholders
In 2007, PricewaterhouseCoopers (PwC) coughed up US$225 million to Tyco International shareholders to settle claims it failed to spot massive accounting fraud while working as the conglomerate’s auditor, in one of the largest ever payouts by a professional services firm.
Former Tyco CEO Dennis Kozlowski and former finance chief Mark Swartz were convicted in 2005 of looting the company and are serving prison terms of up to 25 years.
Jay Eisenhofer of Grant & Eisenhofer, one of the law firms representing investors, said the settlement was a victory for investors.
“It is a substantial amount of money to be paid by (PwC). It shows that there can be serious consequences when there is a breakdown in the audit function,” it said at the time.
Ernst & Young and Lehman Brothers shareholders
In 2013, Ernst & Young (EY) agreed to pay US$99 million to former Lehman Brothers investors who accused the auditor of helping Lehman misstate its financial records before the investment bank’s collapse, which triggered the 2008 financial crisis.
Investors had accused Lehman’s directors of painting a misleading picture of the firm’s health in financial statements and securities offerings. EY and the underwriters contributed to the fraud, they alleged, by failing to investigate and ensure the truthfulness of the statements.
EY denied all liability, but said it was settling the case “to put this matter behind us”.
“Lehman’s audited financial statements clearly portrayed Lehman as what it was – a highly leveraged entity operating in a risky and volatile industry; and Lehman’s bankruptcy was not caused by any accounting issues,” EY said in a statement.
Deloitte and Hin Leong Trading
Now collapsed oil trader Hin Leong Trading, which owes creditors more than US$3.5 billion, is suing Deloitte & Touche in Singapore’s High Court over allegations the auditing firm failed to detect serious irregularities in its financial statements for over 16 years.
Deloitte had audited the company’s books until its fall last year when its founder, Lim Oon Kuin, admitted that trading losses of US$808 million were not accounted for in its financial statements.
“Deloitte failed to detect the irregularities and the material misstatements,” court documents read. “Deloitte acted in breach of the terms of its engagement with the plaintiff.”
According to the suit, Deloitte issued clean reports for the years between 2014 and 2019, despite the company actually being insolvent since at least 2012, with assets in later statements fraudulently exaggerated.
Lim has been charged with forgery, which he disputes, and assets including bank accounts, properties and club memberships have been frozen by the court.
“We stand behind the quality of our work,” a Deloitte spokesman said in response to the suit.
KPMG and 1MDB
The federal government, the finance ministry, 1MDB and a number of its subsidiaries sued 44 partners of KPMG for US$5.64 billion in July, alleging breaches of contract and negligence in its audit and certification of the development fund’s accounts for the financial years from 2010 to 2012.
In their statement of claim, the plaintiffs allege that the amount sought was equivalent to how much was siphoned from 1MDB between 2009 and 2014 – US$3.197 billion – which happened while KPMG was the fund’s statutory auditor.
The plaintiffs claimed that none of the alleged fraudulent transactions and misappropriations carried out while under Najib Razak’s administration and implemented by the then management was spotted by KPMG during its tenure as the auditors of 1MDB, during which it allegedly issued clean reports for all three years.
A proper audit by KPMG would have identified fraud risk warning signs which the firm would have had a duty to report and which would have led to the discovery of the fraud at 1MDB sooner, the plaintiffs said.
KPMG denied the allegations and pledged to “vigorously” contest the suit, which is ongoing.
Separately, last month, KPMG paid US$84 million to settle a case against it that alleged the firm had failed to identify fraud at timber company Chinese Forestry.
The liquidators of China Forestry claimed KPMG was negligent when it failed to detect serious false accounting ahead of its listing in 2009. It alleged that assets and revenue had been doctored by submitting forged bank statements and company records, and that some KPMG staff had fabricated audit papers during their work.
However, KPMG denied the allegations and claimed it was not negligent in failing to detect the fraud.