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Fantasy Carillion model exposes accounting flaws

Jack Simpson

Walking home from work last week, I was greeted by a Carillion van sitting outside Shoreditch High Street station.

Parked outside the entrance, the recognisable Carillion tagline ‘Making tomorrow a better place’ was emblazoned on its body.

A leftover from the firm’s service contract with London Overground and, if the official receiver’s estimations are anything to go by, a collector’s item.

“It is too early to know an accurate estimate of the level of realisations that will occur, as the company has little in the way of tangible assets,” official receiver David Chapman wrote in his letter to creditors last week.

Mr Chapman revealed in that same letter that Carillion Construction’s estimated liabilities were nearly £7bn.

Even for an industry that has become used to shocks over the past few months, the £7bn figure was far higher than anyone expected.

ECA business director Paul Reeve said the revelation was proof Carillion had been operating on a “fantasy business model” for years.

And it was a fantasy many bought into – including the government, which continued to award Carillion contracts. The wool was well and truly pulled over our eyes.

If you look at liabilities alone, for the year to 31 December 2016 Carillion Construction owed creditors £1.9bn. This is now estimated to have ballooned to nearly £7bn just over a year later.

That number could still grow.

Fingers will be pointed at the auditors and the Financial Reporting Council. But while these should be looked at closely, the truth is that construction is more vulnerable to these oversights than many other industries.

Construction accounting can be built on ifs, buts and maybes.

Profits on contracts can be booked before projects are finished, while losses on jobs can be hidden until it is certain they will not be recovered.

At Carillion, for example, projects such as Aberdeen Western Peripheral Route and the Royal Liverpool Hospital could have all been racking up losses for years, but were only made public at the point of no return.

Writing for CN today, S&P Global Ratings infrastructure director Mar Beltran points out that debts can also be hidden – and that this was likely the case with Carillion.

Ms Beltran explains that the effect of Carillion’s early payment finance scheme does not appear to have been quantified in the firm’s accounts from 2012 to 2016, its negative impact going unreported as a result.

“It therefore masked large part of Carillion’s debt, which should have been significantly higher,” she writes.

Carillion shows that the nature of construction industry accounting makes it difficult to identify problems while they can still be fixed.

Even then, as its estimated liabilities prove, the fallout could be far worse than anyone could expect.

The question is: will the industry be able to spot its next major casualty before it’s too late?

Readers' comments (2)

  • In real terms false accounting pulling in profits early delaying losses and probably dodgy work in progress amounts. All things an auditor is taught to spot in his first year of training. This should have been flagged years ago. What will happen? Don't hold your breath.

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  • Yes Carillion was a case in point how creative accounting on work-in-progress can pull the wool over even auditors' eyes to devastating effect. It seems the Hedge Fund Managers were the only ones not hood-winked.

    However, with Private Finance awards now being seriously affected across Europe, I think that's probably a jerk reaction. Refer to article link

    https://nebula.wsimg.com/2f53bcfdac9b820bd940ba6bb64c51ce?AccessKeyId=95B6737F98B38E354D56&disposition=0&alloworigin=1

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