Insurance software company Watchstone has fired the first shot in a multi-million pound legal battle over KPMG’s botched audit of Quindell – Watchstone’s previous trading name.

Watchstone filed a claim in the High Court this week against the Big Four firm, court records show.

A person familiar with the matter said the claim is related to KPMG’s faulty audit of Quindell in 2013 and the alleged damage it caused the company.

The audit regulator, the Financial Reporting Council (FRC), reprimanded KPMG and fined the firm £4.5m in 2018 for the deficient audit of Quindell.

“It is clear when you get a fine of the scale given to KPMG that the considered wrongdoing of KPMG by the FRC was significant and fell well below the standard required — that should lead to a claim,” the person familiar with the matter said.

READ KPMG hit with £3.2m fine over Quindell audit

The size of the potential claim against KPMG has not been disclosed, but the amount would need to make commercial sense in light of the millions of pounds in legal fees that are often incurred in cases of this size and complexity, the person with knowledge of the matter said.

The person added that the case was still at a preliminary stage.

A KPMG spokesperson declined to comment as did a spokesman for Watchstone.

KPMG admitted that its conduct on the 2013 audit “fell significantly short of the standards reasonably to be expected,” the FRC said in 2018.

The FRC said KPMG failed to obtain reasonable assurance that Quindell’s financial statements were free from material misstatement, failed to obtain appropriate audit evidence and failed to exercise sufficient professional scepticism.

Watchstone’s High Court filing follows a court ruling this summer against accountancy firm Grant Thornton, which established that auditors could be liable for losses caused by negligent audits, the person familiar added.

The Court of Appeal ordered Grant Thornton to pay £22m to Aim-listed Assetco. The judgment found that auditors could be liable for losses caused by dividends that should not have been paid or losses caused by business decisions that were based on faulty audits.

“The combination of the Assetco case and FRC reprimands are going to lead to any company in that situation looking to have conversations with their auditors because the auditor has admitted negligence so it is hard for the auditor to say they have done nothing wrong,” the person familiar with the matter said.

READ Regulator alleges KPMG made breaches in its Carillion audits

In 2014, Quindell was the largest company on London’s junior exchange Aim with a market capitalisation of nearly £3bn.

The stock plunged, however, following a report from short-seller Gotham City Research and an investigation into its accounting practices by the Serious Fraud Office and the Financial Conduct Authority.

Consumer law firm Slater & Gordon bought Quindell’s professional services division in 2015 for £637m in a disastrous deal.

Watchstone agreed to pay Slater & Gordon UK £11m last year to settle the law firm’s claim that Watchstone had misrepresented the value of its business before the sale took place.

Watchstone countersued claiming that Slater & Gordon had received leaked information during the sale process from PwC which had advised it on a restructuring.

In its claim, Watchstone alleged PwC had leaked confidential information to Slater & Gordon’s corporate finance adviser, the investment bank Greenhill & Co.

Watchstone launched a £63m High Court claim against PwC in August over the allegations. PwC is contesting the claim.

To contact the author of this story with feedback or news, email James Booth

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