Carillion – a look into what went wrong
1st June 2018
The latest report on the collapse of Carillion has suggested that aggressive accounting policies and the failings of the auditors are to blame for the scale of the collapse.
The report states that nobody stopped the directors “stuffing their mouths with gold” for years before it went into liquidation in January 2018. The debts of the company are around £7 billion.
It’s reported that in 2016, management had insisted on a healthy profit margin being reported and this resulted in a £53 million adjustment in the accounts. The company was accounting for revenue even before work had been agreed.
The finance director, who retired in 2016, was no doubt fully aware that the accounting practices couldn’t continue to cover up the issues. When he retired at the end of 2016, he sold his shares for £776,000 before the value dropped.
The company had a practice of delaying payments to suppliers for many months. Some subcontractors would be waiting for payment up to six months after presenting their invoices and experienced a number of tactics used by Carillion as excuses not to pay their suppliers.
The cash situation was drastic and the only way to continue to keep the company afloat was to dictate their payment terms to the suppliers, who in many cases were small companies with very little option but to put up with Carillion’s terms of business.
The auditors have also been heavily criticised as all of the big four accounting firms had some level of involvement in Carillion, either through audit work or consultancy work.
KPMG, PWC, Deloitte and EY were paid substantial sums of money for their services, it has been recommended that the Competitions and Markets Authority take a closer look at how the big four firms dominate the audit market and possibly break up the size of these organistaions in order to deal with their conflict of interest. Surely auditors cannot be completely independent whilst earning such fees from their client.
The Pensions Regulator has also come under scrutiny for being too passive and not making use of their powers. The Carillion pension scheme was a defined benefit scheme, based on either final salary or career average earnings.
The pension scheme is reported to have a deficit of over £2 billion.
This sequence of events is all very worrying, in this case it appears that the Carillion board were able to manipulate their results with little resistance. We should expect a review of the processes, which will include the role of the external auditors.
It is possible that even with intervention, Carillion would still have failed but not on the same scale and the creditors may not have been quite as financially exposed as they ended up being.
If you would like to discuss this in more detail, then please contact Gareth Botterill on 01482 862240 or email email@example.com<< Back to Blog