Carillion: Former FD warned the board about "sloppy accounting"

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Carillion’s last finance director blew the whistle on accounting irregularities at Carillion as early as May 2017, more than three months before the firm’s troubles were made public.

Emma Mercer was just six weeks into her role as the FD of construction services in the UK when she identified issues with the company’s accounts. Mercer’s concerns, by all indications, were waved away by Carillion’s CEO Richard Howson, CFO Zafar Khan and and the board.

Mercer identified serious issues with the accounting on major Carillion projects. Those projects included the redevelopment of Battersea power station in London and the construction of the new Royal Liverpool hospital. Specifically, she identified Carillion allegedly using refunds it expected to receive from subcontractors to lower the debt in its annual accounts.

According to board minutes published by the Work and Pensions and Business Select Committees, Carillion’s non-executive director Alison Horner acknowledged Mercer, referring to her as “a whistleblower who did not feel she was listened to”.

Frank Field, chair of the work and pensions committee, said Mercer’s whistleblowing illustrated a culture of denial within Carillion’s management. “While our witnesses have been reticent in oral testimony, these minutes begin to reveal the true picture of a company falling apart at the seams in full view of the board and their auditors.

“Emma Mercer took just six weeks to spot and pull the thread that began the entire company unravelling. That the next Chief Financial Officer had to go through whistle blowing procedures to get her concerns about accounting irregularities taken seriously by the Carillion board is extraordinary. So too is that the board’s response was to reject an independent review and get KPMG, their pet rubber-stampers, to mark their own homework.”

For KPMG, Carillion’s auditors, Mercer’s revelations raises yet more questions around the efficacy of their audit. Mercer's findings triggered a review of contracts and the board committed to an independent review into why the “sloppy accounting” wasn’t not spotted by KPMG, but ultimately decided against it.

After investigating the errors, the KPMG partner Peter Meehan is quoted in the minutes as saying Carillion’s financial results did not need to be restated and that “he did not believe that there was an intent to deceive” but rather that it was due to “incompetence, negligence or sloppy accounting”.

The board minutes puncture the narrative of Carillion’s management that they couldn’t have foreseen the collapse. “These board minutes point to a very different scenario,” said Rachel Reeves, chair of the Business, Energy and Industrial Strategy Select Committee. “Emma Mercer was sounding the alarm but none of the Carillion directors were willing to wake up and listen.”

About Francois Badenhorst

Francois

I'm AccountingWEB's business editor. Feel free to get in touch with comments, tips, scoops or irreverent banter. 

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01st Mar 2018 12:17

A clever backdating of awareness? Lets limit this to say three months before troubles.

And there was me thinking Directors had a fiduciary duty and obligations under wrongful trading. Silly me.

More toothless legislation on it's way I expect and it will be our fault again.

Perhaps they could be really daring and disqualify a director and give him a new shadow identity.

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01st Mar 2018 14:35

It would not be the first time that a whistleblower is ignored! I recall there was a lady finance person whistleblowing in the De Lorean debacle, De Lorean tried to ignore her, then when it went public said her story was a load of tosh, then months later it all came out that she was completely right and the company folded. Marta Andreasen was another case - the EU books and records are probably still a work in progress and the EU still does not have a clean audit report. Check out women whistleblowers on Wikipedia, there are plenty more.

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By tedbuck
01st Mar 2018 16:32

Interesting that so many Companies audited by the big 4 seem to come to grief amid huge surprise.
Could it be that perhaps they are so big that they are unauditable?
So much of audit work is filling in endless forms and reviews that it is surprising that anyone has time to actually think what they are doing so perhaps they don't and just tick the boxes so that the report can be signed.
If a new CFO can pick things up that quickly then surely not only the Directors are a bit gullible but so are the Auditors.
Probably the Audit Partner reviews the file and if it looks all right it is. It is difficult to see how, in a business of that size, an Audit partner can be in a position to make a valued judgement of the state of the business on the basis of an audit file and a set of accounts. Perhaps the answer for the future is to have an audit staff member overseeing the business from inside - a bit like an internal auditor but being paid by the actual auditors.
Well it's a thought. What we have now obviously doesn't work very well.

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By ShayaG
02nd Mar 2018 14:54

Doesn't this sound just like the Tesco's scandal - anticipating refunds from suppliers? Or was this just about netting off a creditor with a debtor?

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02nd Mar 2018 17:37

Not sure about clever backdating awareness. My Client is one of the sub-contractors that was told by PWC that the Carillion Company they were contracted to was not in liquidation and they had nothing to worry about. They asked me to look into it, and just tracking the accounts from the main Company through all the subsidiaries makes very interesting reading. But it is all there, every subsidiary with large inter-company loan accounts, every one signed off by the same CFO and the Auditors stating the following:

"The company participates in Carillion plc group’s centralised treasury arrangements and so shares banking arrangements with its parent and fellow subsidiaries. The directors, having assessed the responses of the directors of the Company’s ultimate parent, Carillion plc, to their enquiries have no reason to believe that a material uncertainty exists that may cast significant doubt about the ability of the Carillion group to continue as a going concern or its ability to continue with the current banking arrangements. As with any company placing reliance on other group entities for financial support, the directors acknowledge that there can be no certainty that this support will continue, although at the date of approval of these financial statements, they have no reason to believe that it will not do so."

Then looking at the main Company accounts and it is obvious it couldn't back diddly squat, let alone it's subsidiaries. But every set of accounts signed by the same person.

On the assumption (being generous) that different people from KPMG were auditing different Companies, then I have some sympathy, because for them, not getting an overall view, it is not seeing the wood for the trees. But surely someone higher up has the capability of looking at the Company accounts across the board and getting an overview. As for the CFO, well ..............!

Obviously I told my Client to down tools, which, thankfully they did (for once taking my advice!). A week later the rest were put into liquidation.

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02nd Mar 2018 20:33

There is nothing unauditable about Carillion or any other large company. They are just a collection of small companies added up.

Where the problem lies goes to the very core of what is wrong with our profession - the very dodgiest accountants are running it!

Just about every dodgy audit is carried out by the Big 4. Just about every big tax-dodging scandal has the Big 4's fingerprints all over it.

What we need to do is start striking off - and ideally jailing like they do in USA - these dodgy accountants. We've proved over the last 100 years beyond any reasonable doubt that self-regulation is a load of baloney. Someone has to stand up to the Big 4, start fining them personally - not corporately - in the millions and jailing them.

Clearly this needs some legislation first, though.

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By ShayaG
to mr. mischief
13th Mar 2018 12:58

100% agree, but I don't think this is a Big 4 issue. It's an auditor issue.

Partially, it's about culture, but mainly it's about the audit model.

He who pays the piper calls the tune. An auditor who isn't servile in his dealings with clients will never make partner. The model is broken.

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03rd Mar 2018 07:02

When I first started studying accounts, I was taught never to count income until it was realised, and provide for all costs in lieu of evidence to the contrary.

In short, be pessimistic and conservative.

And another basic principle of accounts is to book transactions into the accounting period in which they become material, or to which they relate.

Recent accounting scandals seem to have unsavoury doses of financial wishful thinking, presumably so that top management can cover itself in glory with those they wish to impress.

And it seems also that the Big Four have been lax in their responsibility to audit critically and accurately.

There are lessons here for those starting out in accounts, just as I was taught nearly 30 years ago. Hopefully, those lessons will be taught, and resonate when today's accounting students reach senior positions.

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06th Mar 2018 08:38

When I trained I was taught that the 3 principles of auditing are integrity, independence and impartiality.

The reality of Big 4 audits is that the 3 principles are:

Fee, fee, fee.

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By ShayaG
to mr. mischief
13th Mar 2018 13:00

SME audits too. Too easy to bash on the Big 4 - but they're not the only ones. It's an industry problem, and a problem with the model.

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13th Mar 2018 11:38

Extract above
Frank Field, chair of the work and pensions committee, said Mercer’s whistleblowing illustrated a culture of denial within Carillion’s management. “While our witnesses have been reticent in oral testimony, these minutes begin to reveal the true picture of a company falling apart at the seams in full view of the board and their auditors.
I am quite a fan of Frank Field, at least Emma Mercer had the courage of her convictions to cover her backside, its amazing how many directors cannot be bothered to even do the minimum to cover their rears.

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By ShayaG
13th Mar 2018 13:09

In order to progress in any firm - big or small - you have to bring in the fees and retain them. And, given that the risks of being caught out by a Carillion style implosion are very small, and the risks associated with upsetting a client are very large, when the client has been severely testing boundaries, an auditor is likely to vacillate, hiding behind materiality or professional judgement, rather than tell a client "no".

There are few promotions for seniors who find problems, or for managers who say "no" to clients. There are few fees for partners who say "no" to clients. As long as through some convoluted misunderstanding of the accounting standard, all the boxes have been ticked, the pressure is on to find a creative way to say "yes" to clients. They call this being client-centric, or solutions focussed, or commercial. I call it inevitable.

It's for the politicians to fix this broken system with a system of audit that the public could actually place trust in; but they'd rather get a good clip for twitter berating the latest accountant to have played the game and lost.

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