Carillion collapse raises audit and governance questions
Monday’s news that construction giant Carillion has filed for liquidation has raised fundamental questions of its board, auditors and the government about how this could have happened.
One of the UK government’s biggest contractors, the Wolverhampton-based firm had amassed more than £900m worth of debt and a £587m pension deficit before its compulsory liquidation at the start of this week.
As late as March last year board members claimed the firm had “substantial liquidity with some £1.5bn of available funding”.
However, Carillion’s problems began to snowball in July when it announced it was losing money on a number of large contracts and its debts were rising. Despite this, the company continued to win government contracts, leading to criticism of Carillion’s management and the government as to why those contracts were tendered for and awarded.
In July 2017 chief executive Richard Howson left the company, and between July and November 2017 Carillion issued three profits warnings and saw its shares crash by 91%.
Crisis talks with the government ended this Sunday as Carillion failed to secure the funding required to support its rescue plan, and the company filed for compulsory liquidation on Monday morning, with accountancy firm PwC appointed as administrator.
Liquidation and creditor impact
Documents seen by the Financial Times show that Carillion had just £29m in cash when it collapsed. In a document for the company’s insolvency process Keith Cochrane, the company’s interim chief executive stated there was so little available both PwC and EY rejected requests to be taken on as administrators amid concerns they would not be paid.
A reported 30,000 small firms are owed money by the organisation, and according to a witness statement filed at the High Court by Carillion’s chief executive expected recovery for creditors in liquidation is 0.8 to 6.6 pence in the pound.
Graham Randall, partner at corporate recovery specialists Quantuma, commented that the failure of Carillion will have a “serious impact on employees and its supply chain, putting the financial future of many people and smaller businesses at risk”.
“Carillion appears to have won HS2 and other government contracts after their financial difficulties emerged last year,” he added, “this raises significant questions over the judgment of government officials and their handling of the due diligence process that took place when these contracts were awarded.”
Carillion’s UK staff working in private sector jobs could also have their wages stopped on Wednesday unless their jobs are rescued by other firms, although the government has agreed to cover those working in the public sector.
Some of the criticism has also focussed on KPMG, which has audited Carillion since 1999, with experts asking whether the Big Four firm had done an adequate job.
Prem Sikka, professor of accounting and finance at Sheffield University told AccountingWEB that KPMG has some “serious questions to answer”.
“Carillion’s accounts for the year to 31 December 2016 received a clean bill of health from KPMG on 1 March 2017,” said Sikka. “KPMG said that the company was a going concern, but barely four months later the company issued a profit warning and its chief executive was sacked.
“Overall,” continued Sikka, “there are questions about the robustness of KPMG audit. What did it examine to enable it to reach the conclusion that Carillion was a going concern for the next twelve months? How thorough and independent was that examination?
According Carillion’s latest filed accounts, the company’s biggest asset is listed as goodwill, something Sikka expressed surprise and concern.
“How on earth do you raise new finance by offering goodwill as a security? How on earth did somebody come to conclude that the business had the ability to raise enough finance to remain a going concern?
“About £1.57bn was listed as goodwill. It’s a ridiculous amount and that means there’s hardly anything you can realise into cash, especially on liquidation when the whole thing is a dead loss.”
A statement from the Financial Reporting Council said the watchdog has been “actively monitoring this situation for some time in close consultation with other relevant regulatory bodies.
“We have powers to investigate the circumstances relating to the audit of Carillion as well as the actions of the relevant accounting professionals,” continued the statement, “We are obliged to follow due process and will make a further statement on this matter shortly.”
KPMG said it would “co-operate fully” with any inquiry, and said its audits had been “conducted appropriately and responsibly”.
“We recognise that it is important that regulators acting in the public interest review high profile cases,” said a spokesperson, “and will of course cooperate fully with any enquiries that the FRC or other regulatory agencies may make.”
Commenting on the failure MP Frank Field, chair of the work and pensions select committee, said: “Carillion took on mega borrowings while its pension deficit ballooned. We called over a year ago for [The Pension Regulator] to have mandatory clearance powers for corporate activities like these that put pension schemes at risk, and powers to impose truly deterrent fines that would focus boardroom minds.
“It seems we have a new case like this every week,” continued Field, “and this one is particularly disastrous, with massive job losses and 28,000 current and future pensioners at risk. I would like to ask the Government today: what more is it going to take?”