Carillion directors slammed for ‘knowingly and recklessly’ misleadingby
Days after KMPG’s punishment for lying to regulators about Carillion’s auditing was finalised, another watchdog has dished out sanctions to former bosses at the doomed outsourcer for deliberately misleading investors and shareholders.
The UK’s financial watchdog has fined three former Carillion directors, accusing them of “recklessly” and “wilfully” publishing false information about the collapsed outsourcer.
Former Carillion chief executive Richard Howson is facing a £397,800 penalty, while former finance officer Richard Adam was handed a £318,000 sanction, with former finance director Zafar Khan to pay £154,400.
The Financial Conduct Authority (FCA) said Carillon would have been given a financial penalty of £37,910,000 if it had remained solvent.
The outsourcer, which employed 43,000 people to provide services in defence, education, health and transport, became the largest construction bankruptcy in British history when it went under in January 2018.
‘Damaging to market integrity’
Carillion “recklessly published announcements” on December 7, 2016, March 1, 2017 and May 3, 2017 that were “misleading and did not accurately or fully disclose the true financial performance” of the business, the FCA said.
“Those announcements made misleadingly positive statements about Carillion’s financial performance generally and in relation to its UK construction business in particular,” the regulator said. “The announcements did not reflect significant deteriorations in the expected financial performance of Carillion’s UK construction business and the increasing financial risks associated with it.”
Carillion’s systems, procedures and controls were weak, and accounting judgements poor, the FCA said.
Howson, Adam and Khan “acted recklessly and were knowingly concerned in Carillion’s contraventions”, the regulator said. The trio were each aware of the failing financial performance within Carillion’s UK construction business and the increasing risks, it said in a series of decision notices.
Howson was chief executive for five and a half years before resigning as the contracting giant revealed a huge and unexpected contract provision in July 2017, while Adam was finance director for almost a decade until his retirement at the end of 2016. His successor, Khan, lasted just nine months in the role. Carillion’s last finance director blew the whistle on accounting irregularities as early as May 2017, more than three months before the firm’s troubles were made public.
The three former executives have referred their cases to the Upper Tribunal where they will each present to the court. The Upper Tribunal court can either uphold the FCA's fines and other actions or dismiss them. Carillion itself has not sought to challenge the FCA's decision.
“Carillion failed to take reasonable steps to establish and maintain adequate procedures, systems and controls,” said Mark Steward, FCA executive director of enforcement. “As a result, its true financial position remained hidden over many months and the effects of its collapse were aggravated, causing substantial harm to shareholders and creditors.”
It amounts to market abuse, Steward said, which is “as damaging to market integrity as insider dealing and manipulation”.
Substantial reviews ongoing
Separately, the Financial Reporting Council (FRC) is probing KPMG's auditing of Carillion, and industry experts believe the publication of the FCA’s findings may clear the path for the accounting watchdog to follow up.
Only the attempts to mislead regulators have been dealt with to date; further sanctions are likely once reviews of the suspect audits have been carried out.
Investigators have reviewed “a substantial volume of material”, according to the FRC, including the audit work papers, documents produced by Carillion and third parties such as internal auditors and external advisors, and emails and other correspondence.
Carillion’s demise led to a number of overlapping investigations from government agencies, and also fuelled regulatory change of the audit sector. However, many of the rules drawn up in the wake of the collapse have yet to take effect.
Earlier this year, Carillion auditor KPMG was fined £14m by the Financial Reporting Council for misleading a regulatory review into the quality of its audit of the contractor before the collapse. Five former senior auditors were also fined and given lengthy suspensions from professional activities.
Last week, the FRC confirmed the sanctions would stand.
Creditors and the firm’s pensioners have suffered steep losses in the years since the company sank. An initial report published by lawmakers in June 2018 said the government’s overriding priority for outsourcing had been spending as little money as possible while forcing contractors to take unacceptable levels of financial risks.
Last year the Insolvency Service said Carillion’s “total deficiency” at the time of its demise was £3bn.
An £845m profit warning on 10 July 2017 prompted the firm’s share price to plummet by 70% over the course of three days. Days later government started making contingency plans for the business’ demise, a National Audit Office report subsequently revealed.