Gross failings of corporate governance and accounting at Carillion laid bare

Accounting firm EY suggested breaking up Carillion and selling its profitable assets before it went bust.

An independent review of collapsed UK government contractor Carillion has revealed a highly negative analysis of the company’s position and business practices.

The review was commissioned in September last year, to provide information for prospective lenders to Carillion – but it seems unlikely it would have secured any more funding for the company, in any case.

According to the Commons Work and Pensions and Business, Energy and Industrial Strategy Committees:

  • “The Group’s profit warning and the quantum of the provisions taken cast significant doubt on the true historic trading position and cash generation of the business. Rather than addressing the underlying challenges facing the Group in respect of problem contracts and the strength of the balance sheet, transactions were entered into, and accounting treatments and assumptions made, to enhance the reported profitability and net debt position of the Group.”
  • “The Group has not attempted to re-state its underlying revenues and historical profitability for the impact of the £1.1bn of provisions taken in 2017; however it is apparent that, for a number of years, the Group has been compensating for the failure to convert reported profits into cash through the incurrence of further debt (both on and off balance sheet) and the aggressive management of working capital.”
  • “Management believe our sensitivities overstate the risks and are too harsh. Given the material funding requirement, risk items outside of the Group’s control, weak information systems and the businesses track record, we consider that our sensitivities reflect a balanced view (and not a worst case).”
  • “Whilst circumstances outside of the Group’s control are a factor in the operational challenges faced on certain projects, a lack of management attention to (and accountability for) addressing key issues, governance failures over the amount of risk being taken on, and a focus on short term financial benefits (net debt and cash) at the expense of long term profitability and viability are significant contributing factors.”
  • “In addition to the £1.5bn of financial debt at Plc, the Group has amassed a further c.£250m to £300m of ‘core debt’ through it’s off balance sheet supplier financing (EPF) arrangements, which extend payment terms on the supplier base from c.30 days to c.120 days and has received significant advance payments on construction and ICT (Wipro) supplier contracts.”
  • “In addition, the Group is further overburdened with a number of defined benefit pension scheme liabilities, which in aggregate are estimated to have a (technical provisions) funding deficit of approximately £700m (and a Section 75 liability of c.£2.8bn).”
  • “The historical year-end and half-year public reporting of the Group’s net debt has been aggressively managed through the short term deferral of payments, acceleration of receipts and receipt of short term loans from JVs.”[Joint Ventures]
  • “Indeed, the detailed presentation and availability of robust historical financial information is extremely weak; in particular as it relates to the historical working capital movements of the Group (which are the principal drivers of cash flow) and business unit profitability.”
  • “This is in part due to poor accounting information systems, a lack of senior finance resource / bandwidth at Group level and weak corporate knowledge in view of extensive management changes throughout the business.”

On January 12, the day Carillion’s board were attempting to secure an emergency £10 million loan from the government that they seemed to believe would enable them to save the company, they paid at least £3.1 million in consulting fees. The government refused the loan and Carillion was forced into liquidation 72 hours later. Responses from PWC, EY and FTI Consulting, also being published, show the amounts they were paid that day – FTI Consulting have clarified that of the total they describe, “£837k (excluding expenses and VAT) was paid on or around that date””

The Committees are also publishing a further response from FSB, which reiterates its position on Carillion’s “poor payment practices”, despite the Carillion directors’ responses  – which the FSB heard “with some weariness” –  when pressed on this in Parliament on February 6. The FSB states: “When the Government finally presents its corporate governance regulations we want to see clear ownership of a company’s payment practices by its whole board. The blank looks and apparent lack of awareness on display to your committees will have been hard for Carillion’s small businesses to swallow.” The IBR also notes Carillion’s “debt has been aggressively managed through the short term deferral of payments” and that it had “amassed further core debt” through “off balance sheet supplier financing (EPF) arrangements”.

Frank Field, chair of the Work and Pensions Committee, and Rachel Reeves MP, Chair of the Business, Energy and Industrial Strategy Committee, said in a joint statement: “There are many losers from the Carillion calamity: employees, pensioners, suppliers and the well-run businesses that pay the PPF levy. Many of those face an anxious wait to see what the consequences of the gross failings of corporate governance and accounting will be for them, their businesses and their families. Not so these omnipresent consulting giants, who can always be relied upon to emerge enrichened from any crisis. As everything collapsed around them, they were merrily cashing cheques.”

The Guardian is reporting that the government failed to retrieve £364 million from Carillion:

“The proposals, presented by accounting firm EY in mid-December last year… would have involved breaking up the company, selling the profitable parts and placing the rest into liquidation, avoiding an involuntary collapse.

“The accounting firm believed this would generate £364m, of which £218m could be injected into the firm’s 13 pension schemes, estimated to have a deficit of close to £1bn.

“One source familiar with the company’s final weeks said this could have prevented some of the schemes entering the Pension Protection Fund (PPF), an outcome that will reduce the amount that many of its 27,500 members receive in retirement.”

A separate Guardian article clarifies that Carillion’s directors could have put £218 million into the company’s pensions scheme, if it had followed the EY plan.

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