Carillion’s 'gross failings of corporate governance and accounting'

04 March 2018

The Work and Pensions and Business, Energy and Industrial Strategy Committees publishes the Executive Summary of an Independent Business Review (IBR) commissioned in September 2017 for prospective lenders to Carillion.

Extracts from the review

Ultimately, Carillion was forced into liquidation and the Draft IBR was never presented. It appears unlikely, however, that it would have helped Carillion secure any further borrowing to add to its already massive debt. The extracts from the Review (PDF PDF 256 KB) reveal a highly negative analysis of Carillion's position and business practices over a protracted period:

  • "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 Friday 12 January 2018, the day Carillion's board were attempting to secure an emergency £10 million loan from Government that they seemed to believe would enable them to proceed to save the company (QQ 63-70) , they paid out at least £3.1 million in consulting fees. 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 6 February. 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".

Chair's comments

Rt Hon Frank Field MP, Chair of the Work and Pensions Committee, and Rachel Reeves MP, Chair of the Business, Energy and Industrial Strategy Committee, said:

"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."

Further information

Image: iStockphoto

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