Who should pay for Carillion?

Carillion in trouble
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The Imprudent Accountant
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An unnamed firm
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You, like me, may have been less than impressed by Philip Hammond as he stood at the dispatch box cracking bad jokes while announcing that the nation would graciously provide some extremely worthy causes and others rather more questionable with relatively insignificant allocations of government funds.

While £10m would be a significant boost to my bank balance and probably that of most accountants, in a Budget where billions and even trillions get frittered away or at least mentioned in passing, such sums represent a barely noticeable drop in the ocean.

The lack of magnitude of such apparent largess became much clearer thanks to a Freedom of Information request from the Unite trade union. This yielded the scandalous news that a far larger sum, estimated to be £150m, has gone to a cause that most of us might regard as considerably less worthy than a local charity or group of underprivileged individuals.

The demise of the construction company Carillion hit the headlines and must undoubtedly have been devastating for those involved at the sharp end, particularly employees who found themselves unemployed either directly or as a result of working for a supplier, which may, in turn, have bitten the dust or been obliged to cut costs in a desperate effort to survive after losing a major client.

Apparently though, the problem stretches much wider. It seems that every taxpayer is going to have to make a contribution to this loss since there is no one else to pick up the tab.

The analysis is chilling. While not far short of half of the estimated black hole is going to meet staff and redundancy payments there are £20m of other closure costs. However, on the plus side for the industry, the largest single figure of all – something like £70m – has been set aside to pay the fees of lawyers and members of our profession for their invaluable services as liquidators and advisers.

All of that having been said, there is another question that I had expected somebody to ask by now. Why should the country and its hard-working taxpayers be expected to pick up the tab if, as has been suggested in the media, there have been significant failures by the auditors and possibly other professional advisers which led directly or indirectly to the collapse of the group or, at the very least, increased the losses ultimately suffered?

If that really is the case, then the government’s internal equivalents to an insolvency team should be able to present a strong, reasoned argument for the nation to claim recompense on behalf of taxpayers from those who are culpable for any element of the loss.

I, therefore, wonder whether the Attorney General, the Chancellor of the Exchequer or perhaps some anti-capitalist MP from the left edge of the Labour Party might eventually come to the same conclusion and seek action.

If so, we might expect one of them to stand up in Parliament before too long with a demand that the authorities take appropriate steps, presumably largely directing their ire towards one or more members of the Big Four, politely suggesting that they might wish to stump up some or all of the £150m shortfall.

If they do, this might be the sharp end of a very large wedge that could have a major impact on the profession for years to come.

There is also a lesson here for us all. I would politely suggest that every accountant should take even greater care to ensure that his or her firm could never end up in the frame for direct attacks by liquidators seeking compensation for failures to get the basics right.

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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16th Nov 2018 13:19

Such liability would result in nobody being willing to do audits. It is bad management, not bad auditing, that mostly causes company failure, so any auditors' liability should be proportionate.

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By ASF
19th Nov 2018 10:41

I agree with @JDBENJAMIN that it is the management of the business (and the industry), that need to bear most responsibility for such failures. I have written before in this column, that this aggressive financial behaviour is not uncommon, and Carillion were very well known among its competitors and former staff for these behaviours. They have to operate on wafer-thin margins, and when they go after growth, to satisfy the markets and their associated personal/board bonus structures, they inevitably take on more risk, often "unbalancing" their portfolio, towards higher-risk opportunities, where virtually everything has to go right, to achieve the tendered profit margins they set for themselves. Often they miss and hope the good contracts support the inevitable bad ones ("portfolio management"!). The government has its own share of the blame to take, in their zeal for VFM contracts, driving pricing ever-lower. Companies like this probably only make 2-3% PBT, and so, when you push people to the wall, this can happen. The company bear's the lion's share of the blame, for sure, but many different stakeholder groups have some blood on their hands.

To blame auditors alone is crazy. But to say they did nothing wrong in all this, is equally as crazy. They need to probe harder, and when audit and consulting fees might be at risk if they were to do so, then we know where the conversation is likely to end up.

Perhaps some comprehensive type of business failure insurance or schemes across the riskier industries might be of some use, in the event of failures, but again, this would likely only (a) raise costs, and (b) provide an easy "disincentive" to all involved, to work hardest for success and survival.

Not an easy one to solve, unfortunately.

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20th Nov 2018 03:21

You know when you are on a sinking ship and that it's prudent to jump off. Directors and entrepreneurs know when the funds they are drawing in emoluments are above the wealth being generated. All the signs are there - funds become scarce to pay creditors and creditors and other liabilities are mounting.
Culpability lies with the Directors and all bonuses without question should be clawed back by the insolvency agents.
Of course business is a risky business but negligent trading under the umbrella of limited liability must be punished and financially penalised.
Further auditors have a huge responsibility to report the state of the business vis a vis profitability solvency and viability. Surely shareholders investors creditors and government need to be informed so that losses can be mitigated and brought to cessation.
Where an audit firm has failed it should pay back the audit fee and be fined £1,000,000. What's the point of accountancy. It's not to tick boxes and certify accounts results as okay. It's a public responsibility to pronounce the truth and protect a myriad of business participants.
Shame on the accounting profession I say.

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