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Carillion’s cosy corporate culture offers lessons for all

Tom Fitzpatrick

“Carillion’s business model was an unsustainable dash for cash… The company largely got its way.”

Every page of the jaw-dropping MPs’ report on Carillion has detail to make the blood boil.

No one comes out looking good: The Pensions Regulator was “feeble”; the Financial Reporting Council “toothless”; crown representatives to Carillion served “no noticeable purpose”. And that’s before you get to the ‘Big Four’ accountancy firms, or the Carillion directors who were “either negligently ignorant of the rotten culture… or complicit in it”.

The cosy relationship between contractors, regulators and major accountants enabled a collapse that left thousands without jobs and and shareholders and supply chains exposed.

Many of those people associated with Carillion’s demise will struggle to find work at the same level, you would assume. Frankly, as much as anything else, this sorry debacle demonstrated why we need more diversity and decency in boardrooms.

Would anyone really believe now that what happened at Carillion isn’t happening elsewhere in the industry? Perhaps not on such a scale, but there is no doubt that as cash is so vital to operations, companies and directors will continue to fiddle while Rome burns.

And what about the ‘advisory’ companies being employed at vast sums to keep an eye on the accounts?

KPMG audited Carillion’s accounts for 19 years, charging £29m in fees. MPs argue it was “complicit” in the contractor’s aggressive accounting, which included reporting money effectively borrowed through its early payment facility as creditor liabilities rather than borrowings, and ignoring critical peer reviews of contracts in favour of management’s optimistic margin forecasts.

As Carillion collapsed, EY was recommending it extend standard payment terms to 126 days as an untapped “cash-generative opportunity”. Just three days before Carillion was declared insolvent, it managed to pay EY £2.5m and other City firms a further £3.9m.

In total, the Big Four is believed to have recouped more than £65m for Carillion-related work over the last decade.

It says something when PwC is considered the least-conflicted Big Four firm to act as special manger to the liquidation, having received £17m for its Carillion-related work over 10 years.

Even opponents of increased private sector regulation must surely see the job losses, waste of taxpayers’ money and damage to the UK’s reputation that Carillion has caused as a wake-up call for corporate governance. Boards across this industry should be demanding greater interrogation of their own numbers to avoid being the next set of grey-faced directors hauled in front of MPs.

One element missing from the report? The role of the media.

MPs state that “until July 2017, there was little public information to suggest that Carillion’s accounts presented anything other than a true and fair picture of the company’s finances”.

Over many years, CN had queried Carillion’s practices on everything from corporate pay [March 2012: Carillion chiefs doubled their 2011 earnings as profits fell] and busted takeovers [May 2012: Carillion sheds 1,180 staff], to supply chain treatment [May 2013: Carillion’s extended payment terms ‘unethical and irresponsible’].

On 14 July 2017, the headline on CN’s front cover read, ‘Can Carillion Recover?’ 

But we didn’t go far enough. It is incumbent on all of us to continue asking questions and to help prevent the next Carillion-style failure.

Readers' comments (3)

  • Kier and Interserve. Watch and learn.

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  • Interesting that E&Y and the other accountancy firms suggested 126 day payments for the rest of the suppliers but were sharp enough to make sure their payments were made just before Carillion imploded.

    Guess Carillion had no choice, given these guys knew just how bad it was and the chances of getting their invoices paid would be zero just a week later. PWC missed out on this but happily got their share a week later, coming in to liquidate on the Governments shilling. Trebles all round!

    Perhaps the payments terms of the accountants of some of the other big players in the industry would make interesting reading.

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  • "Just three days before Carillion was declared insolvent, it managed to pay EY £2.5m and other City firms a further £3.9m"
    The "pari passu" principle requires directors to ensure that creditors are treated equally. For creditors who are not connected parties - this would surely include EY and "other City firms" - the time limit is 6 MONTHS between the transaction and the date of insolvency. These payments made only three DAYS before should now be the subject of intense scrutiny. Where a preferential payment is made Directors could face PERSONAL liability. Who is going to ask these questions Tom???

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