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Carillion directors slammed for ‘knowingly and recklessly’ misleading

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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.

1st Aug 2022
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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.

Replies (8)

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By Trethi Teg
01st Aug 2022 14:41

Why aren't these scumbags in jail? There is no doubt that they sought financial gain from misleading statements which fraud by false misrepresentation isnt it?

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By Hugo Fair
01st Aug 2022 18:23

"The FCA said Carillon would have been given a financial penalty of £37.9m if it had remained solvent."

And yet the three Directors found responsible have been fined a total of £870,200 or just over 2% of the penalty deemed suitable
... which in itself ignores the knock-on £3bn deficiency suffered by shareholders, creditors and (let's not forget) all us taxpayers!

Where's the justice?
And why isn't POCA being applied across the board of senior directors/partners?

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Glenn Martin
By Glenn Martin
01st Aug 2022 20:29

They should be more than slammed for what they did. Do they know how many small contractors failed and lost their businesses as a result of their actions.

I bet they are all also re employed elsewhere in well paid positions.

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By tedbuck
04th Aug 2022 10:37

There are all too many of these situations. The Directors, assuming they weren't totally stupid, must have known what was going on so they are responsible and should be punished. Presumably they were highly paid for their incompetence so the fines ought to be commensurate - how about 4 times the last 3 years salary - gross, of course.

Unless something like this is done these people will go on doing the same thing as there is still a profit in it. I see no reason why they should sit in comfort (even if slightly reduced comfort) whilst the shareholders and taxpayers have to cough up to pay for their incompetence and/or dishonesty.

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By jon watkin
04th Aug 2022 10:48

I remember at the time working for a specialist sub-contractor, with this company as a major customer. There were so many hoops that we had to jump through to gain a contract and having done that, so much time and effort spent obtaining payment for work done, usually long after we had paid our wages and our suppliers. And then there was the pressure to join a supplier financing scheme that basically took a hefty discount to pay us as a 'preferred supplier' or face even longer payment terms. And the company name changes and different variations of the same name. At the time they were heralded as a success story and a model of how a successful business should be run. But it appears now that weak management and deception combined with inadequate oversight from those who should have exercised more professional scepticism, that nothing could be further from the truth. All credit to those businesses that survived dealing with them and commiserations to those that did not.

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By SJH-ADVDIPMA
04th Aug 2022 11:47

The government should start sending those with a fiduciary duty to prison if you want behaviour to change. That goes wider than just the corporate world as well (im thinking Oldham).

We are so weak in this country on law and order, and criminals know it.

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Sarah
By sarahjaneuk
04th Aug 2022 12:30

Fined, though derisory considering the damage they caused.
Prosecution for fraud? (SFO) Struck off as being able to be directors? (CH)

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By rememberscarborough
04th Aug 2022 15:39

I have some sympathy for these people because they are dealing with a system that is broken. If they had told the "truth" then the power brokers within the financial services sector would have chased them out of town and made sure they never got another job. The simple fact is that the City does not want, or accept, bad news and will terminate anyone who delivers it. Better for directors like this to die on their sword than upset the apple cart.

Look to systemic faults rather than shooting the messenger!!

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