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Carillion's finance directors created 'corporate time bomb'

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    Francois Badenhorst

    Francois Badenhorst Business Editor, UKBF & AWEB Staff Member

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    The second joint report on Carillion’s disastrous collapse paints a picture of a seriously compromised finance department and a “rotten corporate culture”.

    The latest report puts Carillion’s “aggressive accounting policies” under the spotlight. The details aren’t pretty. In one particular case study - Carillion’s Royal Liverpool Hospital contract - the company’s management overrode an internal peer review reporting a loss.

    Management insisted on a healthy profit margin being assumed in the 2016 accounts. The difference between those two assessments was around £53m, the same loss included for the hospital contract in the July 2017 profit warning.

    The report goes on to detail a slew of dubious practices: accounting for revenue for work that had not even been agreed, using its early payment facility for suppliers to conceal its drastic cash flow situation, and not accounting for it as borrowing. The only tangible cash supporting Carillion’s profits emanated from a systemic culture of late payments to its suppliers.

    “Whether or not all this was within the letter of accountancy law, it was intended to deceive lenders and investors,” reads the report. “It was also entirely unsustainable: eventually, Carillion would need to get the cash in.”

    Carillion’s finance directors

    The dominant character in Carillion’s aggressive accounting policies was Richard Adam. Carillion’s former finance director retired in 2016. “He, more than anyone else, would have been aware of the unsustainability of the company’s approach,” the report states.

    “His voluntary departure at the end of 2016 was, for him, perfectly timed. He then sold all his Carillion shares for £776,000 just before the wheels began very publicly coming off and their value plummeted. These were the actions of a man who knew exactly where the company was heading once it was no longer propped up by his accounting tricks.”

    Adam’s successor Zafar Khan is portrayed in a more sympathetic light by the review, but it also adds that he should not be absolved of responsibility. “He failed to get a grip on Carillion’s aggressive accounting policies or make any progress in reducing the company’s debt.

    “He signed off the 2016 accounts that presented an extraordinarily optimistic view of the company’s health, and were soon exposed as such.”

    Carillion’s final finance director, Emma Mercer, was spared criticism, however. “Emma Mercer is the only Carillion director to emerge from the collapse with any credit. She demonstrated a willingness to speak the truth and challenge the status quo, fundamental qualities in a director that were not evident in any of her colleagues.

    “Her individual actions should be taken into account by official investigations of the collapse of the company. We hope that her association with Carillion does not unfairly colour her future career.”

    The cosy club

    The Big Four have also been harshly criticised throughout the entire Carillion scandal, and this criticism has only ramped up. Each one of the Big Four firms benefited financially from Carillion’s dysfunction, either through audit work or consultancy services.  

    “This is a disgraceful example of how much of our capitalism is allowed to operate, waved through by a cosy club of auditors, conflicted at every turn,” said Frank Field, chair of the Treasury Committee.

    Rachel Reeves, chair of the BEIS committee added, “[Carillion’s] auditors should also be in the dock for this catastrophic crash. They are guilty of failing to tackle the crisis at Carillion, failing to insist the company paint a true picture of its crippling financial problems.

    “The sorry saga of Carillion is further evidence that the Big Four accountancy firms are prioritising their own profits ahead of good governance at the companies they are supposed to be putting under the microscope.

    “KMPG, PwC, Deloitte and EY pocket millions of pounds for their lucrative audit work - even when they fail to warn about corporate disasters like Carillion. It is a parasitic relationship which sees the auditors prosper,  regardless of what happens to the companies, employees and investors who rely on their scrutiny.”

    Reeves recommended that the Competition and Markets Authority look at the break-up of the Big Four accountancy firms to help increase competition and deal with conflicts of interest.

    'No confidence in our regulators'

    The Financial Reporting Council (FRC) and the Pensions Regulator (TPR) didn’t escape censure, either. FRC and TPR, the report said,  were “united in their feebleness and timidity” and too “passive and reactive” to make effective use of the powers they have.

    The report said the FRC is too content with "apportioning blame once disaster has struck" rather than proactively challenging companies.

    For its part, the FRC provided an update of its investigation into KPMG, Adam and Khan this morning. “Good progress with the investigation is being made by the FRC’s team of lawyers and forensic accountants,” the regulator said.

    The investigation focuses on: contract accounting, reverse factoring, pensions, goodwill and going concern. “The FRC expects to review tens of thousands of documents and emails in order to establish how and why audit and accounting decisions were reached.”

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