Downer EDI lays blame for class action at the feet of KPMG

KPMG will cease acting as Downer EDI’s auditor after the utilities company lodged a third party claim against the firm, arguing it is also liable in class action proceedings.

Downer EDI has lodged a cross claim against KPMG in its defence against a shareholder class action.

Downer EDI has dragged KPMG into a shareholder class action against the company which alleges it failed to keep the market appraised of problems with a $600m AusNet Services contract, with the diversified services firm lodging a third party action and “proportionate liability” claim against its auditor.

KPMG on Monday said in response it would seek to resign as Downer’s auditor immediately, and that it had full confidence in the work it had done.

The class action – now a consolidated suit after three separate actions were joined – relates to “accounting irregularities” in the company’s utilities division which were disclosed to the ASX on December 8, 2022.

Downer says it “intends to vigorously defend” the action, and on Monday filed its defence, as well as the cross claim against KPMG.

Downer said in December 2022 that there had been “historical misreporting of revenue and work in progress in one of Downer’s maintenance contracts”, however did not reveal who the customer was.

“Based on information currently available, the irregularities are estimated to result in a historical overstatement of pre-tax earnings in the order of $30m-$40m at the end of November 2022 accumulated across financial years 2020, 2021, 2022 and 2023,” the company said at the time.

Downer shares plummeted 20 per cent on the announcement in December 2022, however had already been sliding in the days previous.

The company revealed days later, in a letter to the ASX, that it had found out about the issues on December 5, three days before alerting the market, but said it did not have enough information to immediately reveal it to shareholders.

“At that time the information was confidential, comprised supposition, and was insufficiently definite,” Downer said in a response to a letter from the ASX.

Then-chief executive Grant Fenn told an investor call when the announcement was made that the group had initially found that revenue had been recognised prematurely for thousands of separate jobs related to the AusNet contract.

“It overstated the profitability in each period since it began and hid that the contract had been a loss,” Mr Fenn said.

A further earnings downgrade in February last year again sent Downer shares sharply lower, down 24 per cent on the day.

Downer shares have only recently recovered to be trading near the $5 range they were in before the announcements were made, with the stock 1.6 per cent lower at $4.94 on Monday.

Analysts called for change at the top at the time, citing not only the accounting problems, but also the broad erosion of shareholder value through strategies seen as value destructive, including overpaying for Spotless and selling its mining services business for a price seen as too low.

They did not have to wait long.

Then-chief financial officer Michael Ferguson announced his resignation on March 1, Mark Chellew, who was chair at the time, resigned effective immediately on March 3, and non-executive director Peter Watson announced he would resign by the end of the financial year on March 6.

The company had already announced on December 1, 2022, that Mr Fenn would be handing over the chief executive role to Peter Tompkins, who was at that time the chief financial officer, and who remains in charge.

The class action covers shareholders who acquired shares in the period July 23, 2019, when the AusNet contract was announced to the market, until February 24, 2023 – a period which also includes a $400m capital raising in mid-2020 during which the company made forward-looking statements about its profitability.

The claim alleges that Downer was using a bespoke system to manage the accounting function relating to the AusNet contract and its “control systems did not uncover the early recognition of revenue in the AusNet contract for a long time”’.

The action says that by continuing to make public statements about the AusNet contract or failing to correct previous statements, the company “engaged in conduct which was misleading or deceptive or likely to mislead or deceive’’.

KPMG said on Monday it was “disappointed by the decision of Downer EDI to commence proceedings and bring a cross-claim against KPMG in response to a class action claim lodged last year against Downer for breach of continuous disclosure obligations’’.

“We have been open in our engagement with the company throughout this matter and continue to have a high degree of confidence in the audit work performed.

“Commencement of the proceedings leaves KPMG with no alternative but to seek to resign as auditor of Downer Group and we will take appropriate steps to affect this.

“We intend to vigorously defend the claims. As the matters are before the court, we are unable to comment further.”

Originally published as Downer EDI lays blame for class action at the feet of KPMG