The Government is suing KPMG for £1.3bn over allegations it was negligent in its audit of the collapsed contractor Carillion.
Ministers have accused the big four accounting firm of failing to respond to "red flags" in Carillion's accounts ahead of its failure.
They argued that the auditors did not properly size up the "clear and obvious risk" of financial misstatement in a series of major contracts.
The Official Receiver, the government liquidator, said in a claim filed in the High Court that Carillion’s true financial position "bore no resemblance" to its reported results.
The contractor collapsed in 2018 under £7bn of debt, making it one of Britain's biggest insolvencies.
It left 450 projects unfinished and put thousands of jobs at risk. The Government was forced to step in to handle the liquidation of both Carillion and Carillion Construction Limited (CCL), its trading subsidiary.
The case has alleged the company made huge losses and paid out more than £200m in dividends between 2014 and 2016 because it relied on KPMG's audits.
KPMG has also been accused of giving "false and misleading" information to the accounting watchdog ahead of the insolvency.
The firm is facing a formal complaint from the Financial Reporting Council (FRC) over alleged misconduct in the case.
Documents filed in the High Court stated: "KPMG signed unqualified audit opinions in relation to the claimants' financial statements and the group's consolidated financial statements for each of the [full years] 2014 to 2016.
"KPMG thereby reported that in their opinion, having conducted proper audits, those financial statements gave a true and fair view of both the claimants' and the group's state of affairs as at each year-end and the group's and CCL's profit for each year, and has been properly prepared in accordance with the applicable accounting standards, the group's and CCL's accounting policies and the Companies Act 2006."
The legal claim states that "any reasonably competent auditor" would have detected the misstatements made in Carillion's accounts.
The Official Receiver has outlined 15 contracts it said encountered severe delays, cost overruns and other difficulties. It alleged KPMG accepted management's optimistic assertions about the value of the contracts despite knowing there were problems with the underlying finances.
The claim stated: "In summary, KPMG cannot have given any adequate consideration to the risks of misstatement of revenue and costs derived from long-term construction contracts, including through the deliberate manipulation of the accounting for these contracts by management."
A KPMG spokesman said: "We believe the claim is without merit and we will robustly defend the case. Responsibility for the failure of Carillion lies solely with the company's board and management, who set the strategy and ran the business."
Eight former Carillion directors are defending a separate legal action by the Insolvency Service seeking to bar them from running other companies. They have denied any wrongdoing.
The Carillon scandal has prompted calls for widespread reform of the audit industry. Critics have argued that major audit failings have been triggered by the concentration of power among the “big four” audit firms - PwC, KPMG, Deloitte and EY.
The Government has published an audit reform White Paper that proposed banning large companies with poor cash reserves from paying out large dividends and executive bonuses. Company directors also face fines and could be forced to take more responsibility for the accuracy of their company accounts.
The Government is also proposing to set up an audit watchdog to oversee industry.
KPMG has criticised the proposals, saying it will not improve the quality of company accounts.