A major investment firm that owned 10% of Carillion has told MPs it considered suing the the collapsed government contractor over suspicions that directors knew it was in difficulty earlier than they admitted in public.
Kiltearn Partners says it “considered participation in civil legal action against Carillion with a view to recovering a proportion of its clients’ crystallised losses” following its profits warning last summer.
Kiltearn is one of a group of former shareholders who have submitted evidence to the parliamentary committees which are conducting an inquiry into Carillion’s failure. This evidence was released on Monday, as MPs prepare to question the company’s auditor KPMG at a hearing on Thursday.
Two investment institutions said they believed managers had been underplaying the deterioration in Carillion’s finances before it announced an £845m writedown of key contracts and issued a profit warning in July last year.
Edinburgh-based Kiltearn added that it was monitoring an investigation by the accounting watchdog the Financial Reporting Council to see if KPMG, which took £20m in fees from Carillion over 10 years, breached “ethical and technical standards”.
Frank Field, chair of the work and pensions committee, said investors’ evidence suggested a “disconnect” with testimony given by directors, including the former chief executive Richard Howson, who told MPs that Carillion suffered a rapid downturn in key contracts in regions including Qatar in spring 2018.
“On one hand the Carillion directors told us all was sunny until a bolt of Qatari lightning hit them out of the blue,” Field said. “Their stewardship had, they proudly told us, been adjudged ‘best in class’ by their friends at KPMG.
“On the other hand, investors were fleeing for the hills and it appears those who looked closest ran fastest.”
Rachel Reeves, chair of the Commons business committee, said: “Investors spotted that Carillion was heading for disaster and fled. KPMG will have to explain why they signed off on accounts which appeared to bear so little relation to reality.”
Reeves and Field last week accused accountants of “feasting” on Carillion after they admitted accepting £72m of fees over 10 years from the company. KPMG has defended its audit of the company’s finances.
In a lengthy submission ahead of the inquiry’s second evidence session, Kiltearn said it decided to sell shares because it was “not clear what future cash flows would be as there was no concrete information on critical factors”. The company added that even Carillion’s annual reports could “no longer be considered reliable” and that the company had become “impossible to value”.
Kiltearn owned a 10th of Carillion’s shares last summer, but began selling after the July 2017 profit warning. It offloaded its entire holding after a meeting with the interim chief executive, Keith Cochrane, in October 2017 at which it says he gave “limited and vague” responses to fundamental questions, such as its worst-case debt position.
The asset management giant Standard Life Aberdeen told MPs it had begun selling a 10.8% stake in December 2015 owing to concerns about financial management and corporate governance.
Standard Life highlighted fears about Carillion’s widening pension deficit, high debt levels, weak cash generation and falling profit margins in UK construction and the Middle East.
It added that “management was not giving sufficient weight to the probability that trading may deteriorate further [….]” and highlighted fears about its widening pension deficit, high debt levels, weak cash generation and falling profit margins. “The board showed no inclination to drive the management to change,” it added.
Reeves said: “It’s a tragedy for those who have lost their jobs and the suppliers left struggling for survival that Carillion directors ignored these issues.
“Carillion’s annual reports were worthless as a guide to the true financial health of the company. The fact that it was impossible to get a true sense of the assets, liabilities and cash generation of the business raises serious questions about Carillion’s corporate governance.”