At least £170m-worth of accounting problems at Carillion were spotted by a new construction FD in April 2017, which led the company to consider restating its 2016 results.
Minutes from Carillion board meetings in May 2017, released by MPs’ joint inquiry into the firm’s collapse, show that it had to consider restating its 2016 results due to accounting problems on a number of key jobs.
Problems were highlighted in mid-April by construction FD Emma Mercer (pictured), when she flagged to senior managers the use of negative accruals on a number of large projects.
The negative accruals were claims that Carillion had against customers and suppliers on jobs that it was treating as discounts on what it owed, even though the claims had not been realised.
The accounting approach effectively allowed Carillion to reduce its costs on projects.
Ms Mercer, who would later be promoted to group FD, first raised her concerns with the construction MD Adam Green, and then went to the group HR director in order to discuss the issue with the then CEO Richard Howson.
Work and pensions committee chair Frank Field MP described this as “whistle-blowing”.
Carillion’s audit chief Andrew Dougal said the accruals should have been put down as “other debtors” on its balance sheet, treating it as money that might possibly be recovered.
KPMG audit partner Peter Meehan said he “did not believe that there was an intent to deceive, but rather was due to incompetence, negligence or sloppy accounting”.
Zafar Khan, who was group FD at the time Ms Mercer raised her concerns, said there had been “incompetence and laziness” in the accounting process.
Liverpool Royal Free Hospital, Battersea Power Station and the Aberdeen Western Peripheral Route were the problem jobs to have the largest cost-reducing claims.
As these claims had not yet been realised, the board was unsure whether the profits it had stated for 2016 still stood.
To determine whether its financial statements for 2016 could stand or needed to be re-stated, the company drew up “recovery plans” for the affected projects.
This meant finding claims and other value on the projects that could offset the negative accruals and other costs, in order to deliver the same financial positions that were stated for the end of 2016.
This equated to finding £77m on the Aberdeen Western Peripheral Route, £49m on the Royal Liverpool Hospital and £44m on Battersea – a total of £170m.
Mr Cochrane said the recovery plans had to be “credible, with a realistic chance of recovery and not simply an assumption that they would all fall in our favour” when they were presented to KPMG on 16 and 17 May for sign-off.
The board had discussed involving an independent auditor to also check the plans, but this was later rejected.
On 23 May KPMG signed off the company’s recovery plans to cover all the negative accruals, apart from £3m that did not have a “route to recovery”, but which it also judged as “not material”.
As a result, KPMG “remained satisfied [that] the profit recognised on construction contracts at 31 December 2016 was appropriate”.
However, questions were raised about KPMG’s operations and the board wanted assurances that the auditors would not miss what Ms Mercer called “sloppy accounting” again.
Mr Cochrane raised further concerns about KPMG’s approach to its audit, according to the published minutes from board meetings.
They state: “Mr Cochrane reiterated that one of the issues was that in the course of the audit KPMG had spoken only to the accountants, and that they needed to have spoken to the contract leads on all the key contracts.”
The situation concluded on 23 May with an agreement by the board and KPMG that the recovery plans were reasonable and no restatement was necessary.
Business committee chair MP Rachel Reeves said: “Carillion directors say they couldn’t foresee what investors and company staff could: that spiralling debt problems and failing contracts were destined to sink the company.
“These board minutes point to a very different scenario; Emma Mercer was sounding the alarm but none of the Carillion directors were willing to wake up and listen.”
Less than a month later in June 2017 KPMG started an enhanced contract review, which would culminate in the company announcing an £845m provision on 10 July.