Carillion’s former directors could be barred from future directorships and the government must consider breaking up the ‘big four’ accountants, claimed MPs in a damning final report from a joint-inquiry into Carillion’s collapse.
After 15 weeks of taking oral and written evidence, today’s 107-page report from the business and work and pensions committees described Carillion’s board as “both responsible and culpable for the company’s failure.”
MPs called for a government investigation and overhaul of the corporate culture that led to Carillion’s downfall.
The contractor’s collapse was described as “a story of recklessness, hubris and greed”, with directors paying out dividends based on profits that were supported by exploiting its suppliers.
The report said: “The only cash supporting its profits was that banked by denying money to suppliers.”
It described Carillion’s board as “either negligently ignorant of the rotten culture at Carillion or complicit in it”.
Former finance director Richard Adam, ex-chief executive Richard Howson and former chairman Philip Green were singled out for their roles, with a recommendation that the Insolvency Service consider barring them from future directorships.
The inquiry found that Carillion’s executives had painted a false picture of its financial strength to its clients, suppliers and investors by “systematically manipulating accounts” through aggressive accounting and “exploiting its suppliers”.
This included considering a plan by accountants EY to extend standard payment terms to 126 days, which was described as a “cash-generative opportunity”.
Work and pension committee chair and inquiry co-chair Frank Field said government needed to propose “radical reforms to our creaking system of corporate accountability”.
MPs said Carillion was able to become an “unsustainable corporate timebomb” due to “feeble” regulators and “complicit” auditors, which allowed the company to perpetuate its “accounting tricks”, it added.
The joint inquiry has called on the government to refer the Big Four accounting firms – Deloitte, EY, KPMG and PwC – to the Competition and Markets Authority due to “conflicts of interest at every turn”, with the possibility of their audit operations being detached from other services such as insolvency.
“It is time for a radically different approach,” the inquiry’s report found.
Carillion impact to date
The MPs inquiry set up to reveal the reasons for Carillion’s collapse listed the resulting damage so far:
- More than 2,000 jobs lost
- £2.6bn in unfunded pension liabilities with 27,000 members facing reduced pensions
- £2bn owed to around 30,000 suppliers who will receive little from the liquidation
- £150m of taxpayer’s money spent to keep services running
- Total liabilities of around £7bn
Key directors had tried to shift the blame, MPs heard. “They presented to us as self-pitying victims of a maelstrom of coincidental and unforeseeable mishaps,” the inquiry said.
Business committee chair and inquiry co-chair Rachel Reeves said: “The company’s delusional directors drove Carillion off a cliff and then tried to blame everyone but themselves.”
Mr Adam, who served as finance director from April 2007 to December 2016, came in for strong criticism as the “architect of Carillion’s aggressive accounting policies”.
The report described his exit in 2016 as “perfectly timed” and highlighted how he sold his shares in the company for £776,000 “just before the wheels began coming off”.
“These were the actions of a man who knew exactly where the company was heading once it was no longer propped up by his accounting tricks,” the report said.
Giving evidence, Mr Adam said he had been “shocked and saddened by the events” since he left the firm.
Mr Howson, who served as CEO from 2012 to 2017, was called the “figurehead for a business model that was doomed to fail”.
The report said: “His misguided self-assurance obscured an apparent lack of interest in, or understanding of, essential detail, or any recognition that Carillion was a business crying out for challenge and reform.”
Giving evidence, Mr Howson said he was “deeply saddened” and “sorry” for what had happened.
Chairman since 2014, Mr Green was criticised for overseeing “low levels of investment, declining cashflow, rising debt and a growing pension deficit” during his tenure, while dividends continued to paid out year on year.
Mr Green said in response to the inquiry’s report: “The board always sought to make decisions on the best available information and with the best professional advice; furthermore we always strived to act in the interests of the company and all its stakeholders.
”Whilst much of the commentary in today’s report fails to understand and accurately reflect the true, more complex picture of events, the Committee has highlighted lessons which can be learnt by the Board, the government and the wider industry.”
The inquiry recommended that the Insolvency Service investigates whether the three men breached their duties as directors with the potential for disqualifying them from acting as directors in the future.
Former chairman and interim CEO Keith Cochrane and former finance director Zafar Khan were both criticised for failing to “get a grip” on the company’s problems, though it was acknowledged that Carillion was in “deep trouble” when they took over.
The company’s final finance director Emma Mercer was credited with exhibiting “greater frankness” in her evidence to the committees and the inquiry said it hoped her time with Carillion “does not unfairly colour her future career”.
Carillion inquiry report: In-depth
Carillion’s ‘rotten corporate culture’
Suppliers were treated with “contempt” by the contractor, which had been “abusing its dominant market position” by making suppliers wait for payment and “quibbling with invoices to avoid prompt payments”.
Carillion’s early payment facility was heavily criticised by the inquiry.
“Carillion’s use of supply chain finance was unusual in both the harshness of the alternative standard payment terms and the extent to which the company relied on it,” the report said.
The EPF, which could cover up to £500m of invoices at any one time, was called a “wheeze” that the company used to “borrow more, under the radar”.
Carillion also engaged in aggressive accounting and reported £729m of revenue that it later admitted “would not be obtainable”.
The inquiry highlighted its Royal Liverpool Hospital job, on which the company estimated in October 2015 that it would make a 5.5 per cent margin – 2 percentage points more than in its bid – in spite of delays.
Around 10 per cent of its revenue from construction contracts, amounting to £294m in 2016, was “traded not certified” items in the form of claims and variation payments that the company had booked before the client had agreed them.
These practices combined to produce “fantastical figures” in its accounts that were “complacently” signed off by the company’s auditor for 19 years, KPMG, which failed to “exercise professional scepticism”.
Since its 2006 purchase of Mowlem for £350m, Carillion had been on a “dash for cash” and became “increasingly reckless in the pursuit of growth” while ignoring its ballooning pension and borrowing liabilities.
Between 2011 and 2016 the company paid out £441m in dividends while investing just £246m in its pension deficit recovery.
Mr Adam told the pension trustees the company could not afford higher contributions to the pension funds, which was at odds with the “upbeat assessments” of the company offered to prospective investors.
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Carillion inquiry recommendations
Along with an investigation of the directors and a recommendation for the Big Four accounting firms to be referred to the CMA, the joint inquiry called on the Financial Reporting Council and The Pensions Regulator to undergo a “culture change” to become “quicker, bolder and more proactive”.
The inquiry has also expressed concern that PwC has a “blank cheque” for its work as special manager of Carillion’s liquidation, but said government was left with little alternative but to hire the firm.
It recommended regular reviews of PwC’s spending and performance criteria on the job.
Criticism of the government largely focused on the role of the crown representative, which it said should face an immediate review with a consideration of more resources being devoted to the job.
As Construction News revealed, the government had no crown representative in place to liaise with Carillion from September to November last year, when the company posted a £1.15bn half-year loss.
Government procurement favouring the lowest bidders was mentioned in one paragraph, which went on to blame contractors who “danced to the government’s tune” when it came to pricing jobs.
The inquiry said consideration of the government awarding “major” contracts to Carillion was in the scope of reports from the National Audit Office and two other committees of MPs considering public accounts and administration.
The inquiry called on the government to carry out an “ambitious and wide-ranging set of reforms” to “reset our systems of corporate accountability”.
With Carillion’s secrets laid bare, the report said: “The mystery is not that it collapsed, but that it lasted so long.”
It added: “Carillion could happen again, and soon.”
The government must formally respond to the report within two months.