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Aggressive accounting: Carillion's recipe for financial disaster

Zak Garner-Purkis

You are £1,300,000,000 overdrawn.

That’s what a hypothetical Carillion balance enquiry would have read the day the business went bust.

It owed £1.3bn and had £29m in cash, just over 2 per cent of the debt.

Put like that it seems amazing that it survived as long as it did. It also looks like very poor accounting; indeed many have been scorned for far less financial mismanagement.

How can you possibly end up in a situation like that?

A parliamentary briefing paper on Carillion sheds some light. The document, title The Collapse of Carillion, details how exactly one of the UK’s leading contractors ended up in such a chaotic mess.

First, there was the borrowing; over eight years from December 2009 to January 2018, the total owed by the contractor went from £242m to the aforementioned £1.3bn.

And it wasn’t just borrowing from the banks, it also borrowed from its subcontractors, unofficially, by extending the length of time it took to pay invoices to 120 days.

To put that in perspective, the briefing document shows the total owed to “other creditors” went from £212m in 2009 to £761m at the end of 2016.

All this was happening while revenue was flat or falling; in the ten years up to its collapse, Carillion’s revenue fell by 2 per cent.

Then there’s Carillion’s “aggressive accounting”.

The aptly titled practice is when you declare revenue and profit before you’ve made the money, based on optimistic forecasts.

This approach works while expectations and reality are aligned, and you bring forward the benefits of your big wins.

But say a PFI hospital job that you’re anticipating will make you £200m over 30 years, is delayed twice in the construction process, well, that expected profit becomes real-life losses.

Remember that £845m “contract provision” Carillion made at its 2016 results?

That was the contractor admitting that there was nearly a billion pounds worth of difference between what it thought it’d make and what it actually was making.

So what were they spending all that borrowed money on?

Well, a fair amount was going straight to shareholders in the form of dividends, because dividends are paid out based on expected profit, in cash.

The parliamentary briefing calculates that Carillion paid £554m in dividends from 2009 to 2016. The total cash the firm made from operations in the same period: £594m.

Borrowing cash to pay inflated rewards for work that’s failing to deliver seems like a recipe for disaster.

And it turns out it was.

Readers' comments (2)

  • I see you’ve inflated a billion.
    Creative accounting?

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  • From the Plain English Campaign, since 1974, the UK government have been referring to the Billion as a thousand Million. This is traditionally the american method. (http://www.plainenglish.co.uk/campaigning/past-campaigns/budget/how-much-is-a-billion.html) you appear to be referring to a Trillion.
    Even so, £1,300,000,000 is still an eyewatering figure!

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