The Carillion debacle

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The Imprudent Accountant
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The Collapse of Carillion is bad news for everybody apart from the liquidators, and even they may not be getting rich on the back of this one. It also has the potential to show the profession up in an embarrassingly bad light.

We all remember financial catastrophes from the past, including the banking crisis and the collapse of Enron. In the latter case, not only did a corporate giant go down but it took dear old Andersen’s with it.

This time around, after no fewer than three profit warnings, the government or its representatives continue to give valuable contracts to a company that was clearly on the brink of collapse. You can get away with this kind of thing if a miracle occurs, but in this case the inevitable happened.

According to press reports, KPMG are already under fire as auditors of the company, while almost exactly six months ago, EY were hired to review the company’s finances.

Members of the public, the House of Commons Public Accounts Committee, and quite possibly the profession, will all be asking why two of the most esteemed firms of accountants in the world did not manage to identify this impending disaster. If there are only called in at a relatively late stage, I can fully understand why they may not have been able to prevent it but once again, prima facie this does not look good.

Going beyond the external auditors, a company of this size ie one that managed to get £1.5bn into debt, must also have had more than its fair share of accountants on the inside and you have to wonder what they were doing. Probably panicking and bailing like mad.

I am also baffled as to how a company that appeared to be raking in cash from joint ventures with the government could manage to mess up its finances in quite such epic fashion. You would have thought that this was a licence to print money and yet that has not happened.

The consequence is that a large number of government projects will probably be delayed or abandoned, numerous people will lose their livelihoods, directors their bonuses and, despite some kind of public review, I would be willing to bet my shareholding in Carillion that no lessons will be learned.

To me, this is the worst issue. I can understand people making mistakes, even of this magnitude. However, we seem to be completely unable to learn the lessons from almost identical situations that happen on a relatively regular cycle.

Governments typically blame their predecessors, although having been in office for so long, you would think that it will be very hard for ministers to point the finger at the last Labour government. Even so, that is a virtual certainty, since admitting your own mistakes is not something that politicians have been trained to do.

In terms of the profession, there must be questions to be asked about the quality of auditing and financial reviewing in a situation where alarm bells must have been ringing over several years. Indeed, when rats leave sinking ships and hedge funds start selling shares short, you might have thought that auditors would take drastic action. There were further indicators as demonstrated in a Guardian article yesterday.

I fear that the media will be sharing tales of woe about this one for months or even years to come.

About The Imprudent Accountant

About The Imprudent Accountant

Someone who should know better, but can't resist the occasional rant about the more exasperating aspects of the accountancy profession.

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By mumpin
17th Jan 2018 20:38

I think the majority of companies are technically insolvent. The thing that stops this being recognised within the regulatory framework is the going concern concept.
If you were to scrap that and force balance sheet valuations to recognise more risk then you might get a more useful snapshot.

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18th Jan 2018 10:23

Out of interest what was the sum outstanding to HMRC on PAYE and other revenues?#

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to mikefleming3028
18th Jan 2018 13:45

mikefleming3028 wrote:

Out of interest what was the sum outstanding to HMRC on PAYE and other revenues?#

£75 million I heard on the news last night.

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18th Jan 2018 10:23

Out of interest what was the sum outstanding to HMRC on PAYE and other revenues?#

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18th Jan 2018 17:41

My inbox has been alive with liquidators looking to circulate their (no doubt) insightful take on it all.

If this collapse directly affected me or my clients one iota, maybe I'd read one of these many emails.

As it is, I think I'll leave it to others to sort out.

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19th Jan 2018 10:37

I seem to recollect that early on in the news coverage there was mention of 'late payments from Middle East contracts'.
Whilst this probably was a minor contributor to the debacle, the whole issue of leveraging both debt and credit is a pernicious blight on companies of all sizes.
Additionally, the banks are only routinely 'sympathetic' to companies big enough to routinely employ/afford lawyers.
The late payment legislation should be compulsorily applied to all companies with a t/o > say £300M with a 30 day threshold - and it should be illegal to withold any amount not actually in dispute.

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22nd Jan 2018 10:25

Im not sure this is bad news for everyone. Other companies will have opportunities to bid for Carillion's incomplete projects and many of the subcontractors will carry on doing the same work for a new government contractor. Perhaps questions will be asked about how much work is contracted to the private sector. Is it really necessary to contract school dinners to the private sector?
The government did attempt to mitigate the possibility of loss by making contractors jointly liable for projects so that if one failed the other would have to continue. So this is really a failure of corporate governance compounded by auditors who appeared not to warn of the likelihood of impending failure.
This is an entirely different situation from MGRover where the government blocked the sale to a well respected VC and instead sold the business to a bunch of chancers for a tenner leaving thousands without jobs and the Chinese with some of the most valuable trade names in corporate history.

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to Knight Rider
22nd Jan 2018 16:12

Knight Rider wrote:

Is it really necessary to contract school dinners to the private sector?

Answer: yes.

Reason: schools are set-up to teach, not provide catering. The local council can bid/compete with the private sector on equal terms and so often wins the contract, but to just take council/government catering provision without considering if it is the best solution (however measured) is negligent.

Obviously it is necessary to consider the risk that a provider like Carillion may fail mid-contract, but that doesn't mean a state-run school meals service is automatically the best choice.

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