EWJ 60 April 2025 web - Journal - Page 100
The Collapse of ISG: Are the Auditors
in the Firing line for the ‘New Carillion’?
ISG’s collapse into administration in September 2023, was a devastating blow for the
construction industry. ISG had formerly been the sixth largest construction firm in the UK by
turnover and held over £1bn of government contracts. With 2,200 employees left without jobs
and a number of government projects outstanding, there are serious questions to answer, and
people are increasingly starting to look towards their auditors.
On 18 March 2025, the Financial Reporting Council
(FRC), the regulator for accountants and auditors in
the UK, announced it was launching an investigation
into ISG’s auditors. Details of the investigation are not
known at this stage other than that the investigation
relates to the auditor’s review of the 2022 accounts,
i.e., the last set of finalised accounts before the
company’s demise.
this can be quite tricky in practice. As in all negligence
cases, claimants will need to establish duty of care,
breach of duty and causation, as well as quantifying
their loss.
Duty of care can provide difficulties, particularly following the 1990 case of Caparo Industries v Dickman.
In this case, the House of Lords determined that the
auditors did not owe shareholders of the audited entity a duty of care. They set out a three-part test for
establishing a duty of care.
1. Whether the damage was foreseeable.
It's worth noting that the FRC’s threshold for opening
investigations into auditors is relatively low. Matters
are referred to the Conduct Committee simply where
there is information which “raises a question” as to
whether a Relevant Requirement, namely an International Standard on Auditing (ISA), has been
breached. The ISAs are not prescriptive, instead taking a principles-based approach, leaving a lot of room
for interpretation. Hindsight being 20:20, in the wake
of a corporate failure like ISG, this is a relatively low
hurdle to clear.
2. Whether there was sufficient proximity between the
parties.
3. Whether it would be ‘fair, just and reasonable’ to
impose a duty.
Contemporaneous correspondence between the
claimant and the audit firm can therefore be key in
establishing whether a duty was owed.
Comparisons to Carillion, the construction giant
which went into liquidation in 2018, are however, inevitable. Carillion’s collapse was catastrophic, with 420
ongoing public sector contracts open at the time of
going bust and 30,000 suppliers owed a total debt of
almost £2bn. As creditors scrambled to recover their
losses and Carillion unable to pay what it owed, the
Big 4 accountancy firm KPMG, was brought into the
firing line in their capacity as Carillion’s auditors.
KPMG received a record-breaking £26.5 million fine
from the FRC (reduced to £18.6 million after their cooperation discount) for their audit. They also faced a
£1.3bn lawsuit by the liquidators, which they were
forced to settle in 2023.
A forensic review of the audit is then needed to
establish whether the auditors breached said duty of
care. The ISAs provide some guidance on this, but
input from audit experts is needed to determine an
opinion. Furthermore, while an ongoing regulatory
investigation is helpful to the claimant’s case in that it
applies significant pressure to the defendants, the
threshold for opening such investigations is low and
does not necessarily mean there was any wrongdoing
by the auditors. Indeed, regulators regularly close investigations against audit firms with no findings or
sanctions. Auditors are not required to find any and all
fraud, nor can they see into the future. If ISG’s collapse was due to events that happened following the
audit and could not have been known to the auditors
after having made reasonable enquiries, then there is
no case for them to answer.
All eyes are now on ISG and their auditors to see
whether a similarly mammoth claim will follow. Across
the industry we have seen a real trend of professional
negligence claims made against auditors in circumstances where there has been a corporate failing, but
claimants are unable to pursue claims directly against
the Directors or the company as the possibility of recovering any monies from these entities are too low.
The auditors are therefore a much more viable route
to recovery thanks to their (compulsory) professional
indemnity insurance, guaranteeing a payout to
claimants who can establish a sufficiently strong case.
Claimants will also face potential difficulties in
establishing causation in such cases. Using ISG as an
example again, a creditor will want to recover the
money they are owed which will go unpaid as the
company cannot pay the debt. The auditors clearly
would not have been able to prevent the company
from collapsing and so the debt would be unpaid either way. This course of action would therefore be unsuccessful. Instead, a claimant would have to make the
case that if the auditors had warned them that there
was a risk the company would collapse in the next 12
months within their audit opinion, they would not
Guide to establishing a professional negligence case
Establishing a case against the auditors is therefore a
very attractive proposition for potential claimants, but
EXPERT WITNESS JOURNAL
98
APRIL 2025
