Directors of the collapsed government contractor Carillion masked its financial ill-health with aggressive accounting, according to a secret report written last year for banks that were considering lending the company more money to survive.
MPs published the report on Sunday as part of a continuing inquiry into the collapse of a company that provided a host of vital public services, including catering in schools, prison maintenance and construction of new NHS hospitals. Frank Field, chair of the Commons work and pensions committee, said the document was evidence of “gross failings of corporate governance and accounting” at Carillion.
The lenders – RBS, Barclays, HSBC, Santander and Lloyds – commissioned the business advisory group FTI Consulting to analyse Carillion’s finances last September after agreeing to lend it £140m. A draft version of the report detailed a litany of concerns about the finances of a business that hoped to secure another £360m from the five banks in order to revive its fortunes.
FTI warned that Carillion was facing a financial crisis after suffering major losses on key projects in the UK, Canada and the Middle East, accusing it of “overstatement” of profits on the contracts. Less than four months later, Carillion collapsed into liquidation, a process that has so far cost taxpayers £50m, triggered 1,400 redundancies and threatened the survival of thousands of firms in the company’s supply chain.
The Pension Protection Fund, which uses a levy on healthy businesses to rescue the retirement schemes of stricken companies, is expected to pick up its largest-ever liability of £900m, with some of the 28,500 scheme members facing cuts to retirement payouts.
FTI’s report highlighted accounting practices designed to “enhance the reported profitability and net debt position” of Carillion, rather than dealing with its underlying practices. These included deferring payments, bringing forward receipts from contracts and accepting short-term loans from joint ventures it was involved in.
“The group has been poorly managed for a considerable period during which time significant underperformance and contract issues have been masked by aggressive accounting,” FTI said.
It accused the company of accepting large contracts too quickly and on “inappropriate” terms, in order to secure upfront payments and report large contract wins. And it said Carillion compensated for its failure to convert its reported profits into genuine cash by racking up ever higher debts.
When confronted with FTI’s findings, the company’s management said they believed the assessment was too harsh, according to the report. But FTI insisted its report was balanced and did not even represent a “worst case” scenario, adding that lending Carillion any more money would be “extremely high risk”.
Field, who is leading a joint inquiry with the business committee chaired by Rachel Reeves, said the report provided further evidence of poor management at Carillion.
“There are many losers from the Carillion calamity: employees, pensioners, suppliers and the well-run businesses that pay the PPF levy. Many of those face an anxious wait to see what the consequences of the gross failings of corporate governance and accounting will be for them, their businesses and their families.”
Details of mounting concern in 2017 about Carillion’s finances follow reports that investors were “running for the hills” long before the company’s collapse. Further evidence of the scale of its problems is likely to ramp up pressure on the government over its monitoring of a company that had issued a huge profits warning in July last year. The government continued to award it major public works, including a schools building contract in November 2017.
The inquiry is set to take evidence from former investors in Carillion on Wednesday, while the business minister, Greg Clark, and the work and pensions minister, Esther McVey, will be called to a hearing on 21 March.