Profit Warnings - helpful. Cashflow Warning - essential

[GraemeL]

There has been some (politically motivated and other) criticism of the government continuing to award contracts to Carrilion 'even' after there had been several profit warnings.

As I understand it, there is a stock exchange requirement about when profit warnings are necessary. They are indicators of how a business is currently performing, but do not in themselves say much about the ongoing health of a business.

Surely what is much more important is cashflow. I don't think that there is any requirement for companies to give cashflow warnings. Or is there? Wouldnt have been much more helpful had Carillion set out in public its cash position? Should there be a rule about this?

 

[Mr D]

Don't they have to set out their current (well, months old) position in accounts?
Though as we have seen multiple times with big companies, accounts can be fine while problems crop up inside a year.

 

[KAC]

About time the big 4 firms if accountants and auditors were a bit more conscientious when carrying out audits. They bring he profession into disrepute

 

[Mr D]

About time the big 4 firms if accountants and auditors were a bit more conscientious when carrying out audits. They bring he profession into disrepute

Do they do the audits wrong? Or is it the audit that needs changing?

 

[STDFR33]

Can put the onus on Carillion but the body awarding the contract ought to do some due dilligence.

I used to work for a large housing association (£150m turnover). Part of my role was to do financial appraisals on suppliers before contracts progressed to the next stage. Part of that appraisal was cash flow.
These appraisals were done for any contract over £50k in value.

You can’t tell me that no financial appraisals were undertaken on Carillion for these multi million pound contracts.

The problem is that even if there is a concern in the appraisal process, some useless management bod can override you and progress it to the next stage anyway.

Poor management and decision making is to blame here. And you have to question the motive behind the poor management and decision making. I would bet good money that someone has received a sweetener somewhere.

 

[Mr D]

How many due diligencies a year should the government do on any one company?

 

[KAC]

Do they do the audits wrong? Or is it the audit that needs changing?

Never having worked for a large firm, I can't comment on that. Know they are not supposed to be influenced but there was talk of preventing firms providing both audit and "added value" services to clients. Carillion paid them £1.5 million for incidental services in the last year filed. The materiality level n the accounts was £8 million. Quite a few things could slip under the radar at that level. Maybe you're right, the audit ought to be changed

 

[Mr D]

So at the last accounts the audit could have been correct and the auditors signed off on their part as it was .... a viable business as at the time?

 

[KAC]

So at the last accounts the audit could have been correct and the auditors signed off on their part as it was .... a viable business as at the time?

Who knows? The FRC are getting involved and KPMG did certify the company as being strong enough to survive for 3 years. For a PLC to have the same audit firm for 17 years does pose questions about independence. Maybe someone will have to account for their role in the audit before a disciplinary panel?
"The FRC would focus on the role of KPMG, which has audited and signed off on Carillion’s accounts every year since its inception in 1999 and has garnered a total of £29.4m in fees.
In Carillion’s last annual report the company described KPMG’s work as “a high quality and a very effective service” The company’s audit committee, in discussion with KPMG, concluded that judgments on revenue and margin recognition had been “reasonable”. The accountancy firm also approved Carillion’s viability statement, certifying it as strong enough to survive for at least three years."

 

[Mr D]

Is using the same auditing firm as previous time common? Or do these things get put out to tender and the highest score wins?

 

[KAC]

Compulsory audit firm rotation is coming

 

[wevet]

Time and again we see the big auditors PWC, KPMG, EY etc getting away with rubber stamping accounts that a company is a going concern.

These large accountants get another bite of the cherry when it is their turn to act as as administrators when the company goes bust.

There is no incentive for the big accountancy companies to try to claw back fees from the auditors of the failed company because they know that chances are that next time they will have been the auditors of a failed company.

We know that EY who act as administrators will take millions from Carillion while the suppliers get peanuts.

 

[GraemeL]

I don't see this as anything to do with auditors. Carillion didn't issue profit warning because the auditors said they should, they issued them because it would soften the blow for investors when the actual results appear.

My thinking is that there should be a requirement for quoted companies to issue 'cashflow warnings'.

 

[The Byre]

What Carillion did, was to rob Peter to pay Paul. No amount of ordinary auditing of books can discover that. If revenues are fraudulently pulled forward and out-goings are pushed back, the auditing company cannot normally see that. They are not HMRC and end-of-year audits are not an HMRC criminal investigation into tax fraud, that can investigate each and every transaction and payment.

As far as cash flow (Cash Floe - gad how I loved that woman!) is concerned, it was a juggling act. All it takes, is for one ball to fall to the ground. One of the typical signs of such a juggling act going on, is when companies ask for 90 day payments, or find magic reasons for not paying. There are others, like doing a sale-and-lease-back deal on property and equipment. Yet another, is an over-reliance on sub-contractors and/or agencies, who then find that they have to wait a long time for payment.

The company was running at a loss and had done so for many years. They got away with it, by getting new business and running up ever-increasing debts. Like so many UK companies, it was just one giant debt-bubble and devoid of any real value.

And like any bubble, the bigger it got, the more likely it was to burst!

 

[KAC]

But then what is the purpose of an audit if not, amongst other things, to assess if revenues are fraudulently pulled forward and out-goings are pushed back?

Isn't bringing revenues forward just what happened with Tesco? And also of course with Enron although in that case it caused the closure of Arthur Anderson, the auditing firm involved

 

[Mr D]

@TheByre - the UK government has done sale and lease back deals on a chunk of its assets over the years, should we be worried about the UK government doing a juggling act?

 

[The Byre]

Company law in the UK is, to my somewhat outsider's way of looking at it, absurdly lax. The leading light at Carillion is also director of another 71 companies. How the hell is anybody (other than a criminal investigation with large resources) supposed to find their way through that lot, to look for conflicts of interest or hidden profit shares?

But then what is the purpose of an audit if not, amongst other things, to assess if revenues are fraudulently pulled forward and out-goings are pushed back?

To do that, you would have to interview the other sides (who may be under pressure to not reveal the truth) and that assumes that you can find the other side, be that the right civil servant commissioning the work, or a supplier. See above - payments/revenues can be fed through all kinds of subsidiaries and 'associated' companies and get washed on the way, so that they appear unconditional and timely.

@TheByre - the UK government has done sale and lease back deals on a chunk of its assets over the years, should we be worried about the UK government doing a juggling act?

There is nothing inherently wrong with a sale-n-lease-back, after all, the movie industry would grind to a halt without these deals (sale of movie rights and product-placements, etc. to the bank, lease-back rights, then sale of movie-holding-company to the distributor). But when a company is converting assets into cash (e.g. selling off shop sites and leasing back, signing over IP to the bank, selling off equipment and leasing back) then there has to be a reason for that. Too much cash in that shoe-box under the bed ain't one of them!

IMO, there has to be a brake on the way directors, major shareholders and governors can liquidate a company and just carry on with another, as if nothing very special happened.

 

[Mr D]

IMO, there has to be a brake on the way directors, major shareholders and governors can liquidate a company and just carry on with another, as if nothing very special happened.

We do have a brake, an investigation can ban people from being directors.
Whether its effective, whether its used as much as it should be.....
Would not surprise me in this instance for all the directors to have some form of ban. Whether deserved or not.
Political interference is alive and well. Shouldn't have it but it still exists.