After months of investigation that included five oral hearings and trawling through hundreds of pieces of evidence, MPs have delivered a searing assessment of government contractor Carillion and the circumstances of its collapse in January this year with liabilities of £7bn and just £29m in cash.
It is as unforgiving of individuals as it is of the institutions that failed to spot the warnings as the group spiralled towards failure.
Although Carillion’s board “presented to us as self-pitying victims of a maelstrom of coincidental and unforeseeable mishaps”, the company’s rise and “spectacular fall” was a story of “recklessness, hubris and greed,” the UK parliament’s cross-party business and work and pensions committees concluded.
Carillion was a key contractor to the UK government, with 43,000 employees worldwide and 19,000 in the UK, providing everything from construction to hospital and prison cleaning, school meals and facilities management for the Ministry of Defence.
But it was also a company run in a state of semi chaos. Sarah Albon, chief executive of the government’s Insolvency Service, which is in charge of winding the company up, said Carillion’s “incredibly poor standards” made it difficult to identify even information that should have been “absolutely, straightforwardly” available, such as a list of current directors.
The company collapsed after a series of crippling financial provisions last summer undermined its finances just months after presenting much more healthy 2016 accounts and signing off dividends worth £78m.
Its failure has stalled construction projects, left creditors, investors, employees, subcontractors and pensioners nursing heavy losses and prompted doubts about the growth-at-all-costs model that is often employed in the outsourcing industry. Share prices have been hit across the sector and two other big companies, Capita and Interserve, have refinanced their debt.
Carillion’s business model was characterised by a “relentless dash for cash, driven by acquisitions, rising debt, expansion into new markets and exploitation of suppliers,” the MPs concluded. “It presented accounts that misrepresented the reality of the business and increased its dividends come what may.”
The first wave of provisions— £845m in July — was presented as the “unfortunate result” of sudden deteriorations in key contracts between March and June that year. Instead, audit committee papers show that at least 18 contracts had provisions made against them.
Although a November 2016 internal review of Carillion’s Royal Liverpool Hospital management contract stated it was making a loss, management insisted a “healthy profit margin” was assumed in the 2016 accounts, the report revealed.
Other “aggressive” accounting policies included booking revenues for work that had not been agreed, delaying payments to suppliers so that they could be used in effect as a “credit card”, and “routine quibbling” over invoices.
“Whether or not all this was within the letter of accountancy law, it was intended to deceive lenders and investors,” the committee said.
‘Rotten corporate culture’: report singles out three executives
Carillion’s finance director was the “architect” of Carillion’s aggressive accounting policies and refused to make adequate contributions to the pension scheme, which he considered a “waste of money”, the committee said. His voluntary departure at the end of 2016 and the subsequent sale of all his shares worth £776,000 were “the actions of a man who knew where the company was heading”
Chief executive from 2012 to 2017, he was the figurehead for a business that spiralled progressively out of control under his “misguidedly self-assured leadership”. He demonstrated “little understanding of the basic failings of governance” and believed until the end that bar a few, challenging contracts, the business would have survived. He received a bonus of £245,000 in 2017
Named chairman in 2014, where he served until the liquidation in January. Between 2011 and 2016 he acted as corporate responsibility adviser to the government despite a Pensions Ombudsman ruling against him. His board agreed a rise in renumeration for itself from £1.8m to £3m between 2014 and 2016. The workforce, by contrast, received a 2 per cent pay rise in 2016
But if the board and management came under fire, there are also serious implications for the “panoply of auditors and advisers who looked the other way” and which have been “richly compensated”, according to the report.
Not only was the auditing industry found to have “conflicts of interest at every turn”, MPs also noted that KPMG had failed to qualify Carillion’s accounts once in the 19 years it acted as external auditor, while receiving £29m in fees over the period.
“In failing to exercise — and voice — professional scepticism towards Carillion’s aggressive accounting judgments KPMG was complicit in them and should take its own share of responsibility for the consequences,” the MPs said.
Nor was KPMG, which is under investigation by the accounting watchdog, the Financial Reporting Council over Carillion, an “isolated failure”, the committee added. “It was symptomatic of a market which works for the members of the oligopoly but fails the wider economy.”
EY received £10.8m for six months of turnround advice as the company headed inexorably towards collapse. Although PwC had advised the company, its pension schemes and the government on Carillion contracts it was appointed by the government to manage the liquidation — in effect “writing their own pay cheque, without adequate scrutiny”, the report said.
Deloitte acted as internal auditors advising the board on risk management and financial controls. Yet despite their assistance these were the failings that “ultimately proved terminal”. Nor did Deloitte seem to know of key disputes — such as a conflict with Msheireb, a Qatari company, over who owed whom £200m, which has still not been unravelled. Collectively the big four received £51.2m for work relating to Carillion over the past decade, and a further £14.3m from government for work relating to contracts with Carillion.
Names such as EY, law firm Slaughter and May and banks Lazard and Morgan Stanley were used by the board as a “badge of credibility”, the report said. But the appearance of prominent advisers proved nothing other than the “willingness of the board to throw money at a problem and the willingness of advisers to accept generous fees,” MPs added.
The watchdogs were also united in their “feebleness and timidity”. The Pensions Regulator “failed in all its objectives”, refusing to impose a contribution schedule to address the pension funding gap, despite warnings from trustees. Carillion’s failure has left a pension deficit of up to £2.6bn and payments to the 27,000 members of its defined benefit scheme have been cut.
The FRC, which is the subject of an independent review, contacted the company in relation to 12 different issues but was “too passive” and failed to follow them up.
Meanwhile, the government provided little warning of risks in a key supplier and its reaction to “weakness exposed by this and other corporate failures has been cautious, largely technical and characterised by seemingly endless consultation”.
By the time of its failure in January 2018, the total group structure comprised 326 companies, 199 based in the UK, of which 27 are now in compulsory liquidation.
Pensions watchdog needs ‘cultural change’
MPs have called for “substantial cultural change” at the regulator in charge of protecting millions of workplace pension savers, describing its oversight of collapsed contractor Carillion as “feeble”.
In a report published on Wednesday, the business, energy and industrial strategy and the work and pensions committees concluded the UK’s Pensions Regulator had failed in all its objectives for the Carillion pension scheme. “Carillion consistently refused to make adequate contributions to its pension schemes, favouring dividend payments and cash chasing growth,” said the report.
“It was a classic case for the regulator to use its powers proactively. The Pensions Regulator’s feeble response to the underfunding of Carillion’s pension schemes was a threat to impose a contribution schedule, a power it had never — and has still never — used.”
About 27,000 of Carillion’s retirement fund members face cuts to their promised pensions, after 11 of the company’s 13 plans were transferred to the Pension Protection Fund, which pays compensation to pension scheme members of insolvent companies, with an estimated £800m funding shortfall.
“Carillion’s pension schemes were not dumped as part of a sudden company sale; they were underfunded over an extended period in full view of TPR,” said the report.
The report noted that the Pensions Regulator now has different leadership and recently promised to be “quicker, bolder and more proactive”.
The government is also consulting on strengthening its powers.
“These are positive developments,” said the report.
But the MPs said they were “deeply concerned” by the evidence from TPR under its new leadership of Lesley Titcomb, “which sought to defend the passive approach they and their predecessors had taken on the Carillion pension schemes”.
The report concluded “substantial cultural change” was required in an organisation where a “tentative and apologetic approach is ingrained”.
“We are far from convinced that TPR’s current leadership is equipped to effect that change,” said the report.
In response, Ms Titcomb said the regulator was “now a very different organisation”.
“We actively seek to learn lessons to better protect members of pension schemes,” she said. “The report underlines the significant changes already made at TPR but there is more work to do.”
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