Downer EDI says KPMG picked up issues with a problematic contract, then dropped the ball

Downer EDI says its auditor KPMG flagged the contract at the heart of a pending class action as problematic, then failed to properly examine it.

Downer EDI is defending a class action relating to a contract with AusNet.

Downer EDI says its auditor KPMG flagged the AusNet contract at the heart of a pending class action against the services company as potentially problematic, but then failed to carry out its audit function properly.

Downer is defending a shareholder class action which alleges it failed to keep the market appraised of problems with a $600m AusNet Services contract, which was the subject of a major profit downgrade in late 2022.

The company is denying it is liable in the class action, however has lodged a cross claim against its auditor KPMG - which stepped down this week - which says the professional services firm is the one to blame, if anyone is.

Downer announced in late 2022 that it had identified “historical misreporting of revenue and work in progress in one of Downer’s maintenance contracts” which had led to an overstatement of pre-tax earnings in the order of $30m-$40m across four financial years.

The accounting failures led to a management and board clean out and three separate class actions which have now been consolidated into one.

Downer lodged its defence and cross claim last Friday, and on Monday told the market it was defending the matter, but also lodged a cross claim alleging KPMG was to blame, should blame be apportioned.

Downer’s cross claim, sourced by The Australian, says that there had been correspondence about work in progress for the AusNet contract “which listed 174 works orders for which work in progress ... which had been recognised for 100 per cent of the unbilled amount of the agreed rates, however little cost had been incurred’’.

“On 84 of these works orders, the cost was less than half the sum of the amount billed and the work in progress, together recognised as revenue, suggesting that revenue had been recognised for work not yet done,’’ the claim says.

“KPMG emailed Downer a spreadsheet ... which listed the AusNet contract as one of six ‘selected [for audit testing] as a result of … having large work in progress balances, expected to be more than $5m and we need to have a discussion regarding the expected recoverability of the work in progress and the audit evidence we can obtain for these contracts’.’’

Downer’s cross claim says given that the contracts had been identified as warranting more attention, “if KPMG had exercised reasonable care and skill in auditing the revenue recognised from the AusNet contract, it would have discovered the FY20 overstatement’’.

And had that been done, it would have reported the overstatement to Downer’s audit and risk committee or management, and had management not corrected the error, “would have reported it either to the audit and risk committee or otherwise to the board and requested that they correct it’’.

Downer is seeking damages and compensation from KPMG.

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 says KPMG picked up issues with a problematic contract, then dropped the ball