Construction News

Thu November 15 2018

Related Information

Construction industry off the hook as Carillion report focuses on regulatory failings

16 May MPs investigating the demise of Carillion have concluded that it had a ‘rotten corporate culture’ with dodgy accounting methods but it is the auditors who come in for the most pertinent criticism.

Their report presents Carillion's rise and fall as a story of ‘recklessness, hubris and greed’, its business model ‘a relentless dash for cash, driven by acquisitions, rising debt and exploitation of suppliers’ with at best questionable accounting practices that ‘misrepresented the reality of the business’.

However, the MPs make no suggestion that there is anything wrong with the construction industry model and they make no recommendations for construction industry reform, despite Carillion's supply chain abuse.

Former chief executive Richard Howson is labelled merely as ‘misguidedly self-assured’ and chairman Philip Green ‘an unquestioning optimist’. The auditors, however, should never have let it happen. They were so riven by conflicts of interest that they either could not or would not flag up issues that there were there to see.

The MPs make little or no comment about the broken business model of the construction industry, about the perils of fixed price contracting, or how lugubriously cash moves through the industry supply chain. Nor does it have much to say about how public services and infrastructure might be better procured in the light of Carillion’s failure.

In fact, they have nothing to say about how the construction industry can be improved. Instead, their report is focused on corporate governance – not on why Carillion failed, but on how.

The final report of the joint inquiry into the collapse of Carillion by the House of Commons select committees for work & pensions and for business, enterprise & industrial strategy (BEIS) says that the fall of Carillion was ‘a failure of regulation’. But despite all the hours of questioning the major players, no lessons for the construction industry are offered.

A key recommendation is the break-up of the big four accountancy firms to inject some competition into the dysfunctional auditing market.

“Carillion became a giant and unsustainable corporate time bomb” the MPs say, but the auditors must have realised and it was supposed to be their function to do something.

They also recommend that the government reviews the role and responsibilities of its crown representatives in the light of the Carillion case to introduce ‘a more active and interventionist approach’.

“The government’s crown representative system provided little warning of risks in a key strategic supplier. We recommend an immediate review of that system,” they say.

The report asserts that Carillion’s accounts were systematically manipulated to make optimistic assessments of revenue, in defiance of internal controls. Despite being signatories of the Prompt Payment Code, Carillion treated suppliers with contempt, enforcing standard payment terms of 120 days. Suppliers could be paid earlier in return for a fee, an accounting trick that Carillion used to ramp up borrowings, under the radar.

KMPG was paid £29m to act as Carillion’s auditor for 19 years. It did not once qualify its audit opinion, signing off the directors’ increasingly unreliable figures. In failing to exercise professional scepticism towards Carillion’s accounting judgements over the course of its tenure as Carillion’s auditor, KPMG was complicit in them.

Carillion paid other big-name firms as badges of credibility in return for lucrative fees. Deloitte, paid more than £10m by the company to act as its internal auditor, failed in its risk management and financial controls role. EY was paid £10.8m for six months of failed turnaround advice.

The company’s shareholders suffered from an absence of reliable information and were ill-equipped to influence board decision-making. In the main, they sold their shares instead.

The key regulators, the Financial Reporting Council (FRC) and the Pensions Regulator (TPR), were ‘united in their feebleness and timidity’. The FRC identified concerns in the Carillion accounts in 2015 but failed to follow them up. TPR threatened on seven occasions to use a power to enforce pension contributions that it has never used. These were empty threats; the Carillion directors knew it and got their way, the MPs says.

Rachel Reeves, chair of the BEIS committee, said: "Carillion’s collapse was a disaster for all those who lost their jobs and the small businesses, contractors and suppliers left fighting for survival. The company’s delusional directors drove Carillion off a cliff and then tried to blame everyone but themselves. Their colossal failure as managers meant they effectively pressed the self-destruct button on the company.

"However, the auditors should also be in the dock for this catastrophic crash. They are guilty of failing to tackle the crisis at Carillion, failing to insist the company paint a true picture of its crippling financial problems. The sorry saga of Carillion is further evidence that the Big Four accountancy firms are prioritising their own profits ahead of good governance at the companies they are supposed to be putting under the microscope.

"KMPG, PwC, Deloitte and EY pocket millions of pounds for their lucrative audit work - even when they fail to warn about corporate disasters like Carillion.  It is a parasitical relationship which sees the auditors prosper, regardless of what happens to the companies, employees and investors who rely on their scrutiny.  The Competition & Markets Authority must now look at the break-up of the Big Four accountancy firms to help increase competition and deal with conflicts of interest.

"The collapse of Carillion exposed terrible failures of regulation. The government needs to stop dithering and act to ensure regulators are up to the job of intervening before companies fail, rather than trying to pick up the pieces when it is too late."

Frank Field, chair of the work & pensions committee, characteristically came out with some choice words to attract attention.  "Same old story. Same old greed. A board of directors too busy stuffing their mouths with gold to show any concern for the welfare of their workforce or their pensioners. They rightly face investigation of their fitness to run a company again.  This is a disgraceful example of how much of our capitalism is allowed to operate, waved through by a cosy club of auditors, conflicted at every turn. Government urgently needs to come to Parliament with radical reforms to our creaking system of corporate accountability. British industry is too important to be left in the hands of the likes of the shysters at the top of Carillion."

It is obvious that the collapse of Carillion presents important lessons for the construction industry. The select committees’ joint endeavours have failed to present them.

CBI deputy director-general Josh Hardie said: “The language of the report suggests committee members think business in general is greedy and reckless. This is irresponsible and wholly inaccurate.

"Carillion was a painful lesson for business and government on the dangers of short-termism in public service contracts. This failure should act as a catalyst for a level-headed discussion about how the public and private sectors work together to deliver value to society, as they so often do.

“200,000 organisations play a vital role in delivering public services, providing much-needed innovation and investment - whether through building new classrooms or transforming frontline public services - often in very challenging circumstances.

“Knee-jerk soundbites on Carillon risk locking out innovation and investment at a time when it’s needed most.”

MPU

More News Channels