Carillion Deceived on Debt, Lawmakers Say in Damning Report

(Bloomberg) -- Carillion Plc deceived lenders and investors about its debt levels and was enabled by “complacent” auditors who failed to challenge its “aggressive” accounting, according to a U.K. Parliament report.

The collapsed British company that built and managed government projects “failed to publish the trustworthy information necessary for investors who relied on public statements,” parliamentary committees investigating Carillion said in a 107-page report published on Wednesday. Lawmakers blamed former Carillion executives, auditors and advisers for the January bankruptcy, which left unpaid debts of about 1.6 billion pounds ($2.2 billion), including bank loans and defaulted bonds.

The joint report from the Work and Pensions Committee and the Business, Energy and Industrial Strategy Committee accused former Carillion executives of mismanagement and renewed calls for the U.K.’s competition authorities to consider a break-up of the so-called “Big Four” accountancy firms. It criticized KPMG, Deloitte, EY and PwC, along with banks and other advisers, for poor oversight and “squeezing fee income out of what remained of the company” in its final months.

Big Four

“We recommend that the government refers the statutory audit market to the Competition and Markets Authority,” the committees said in the report. “The terms of reference of that review should explicitly include consideration of both breaking up the Big Four into more audit firms, and detaching audit arms from those providing other professional services.”

EY said that “stakeholders” declined “to support the plan EY helped Carillion to devise” to keep the company afloat, while KPMG said that it had conducted its work “appropriately.”

“There are clear benefits of being a multi-disciplinary firm, but we also recognize the growing challenges that this structure presents,” KPMG said. PwC said it recognizes “the report’s aim to understand the lessons from Carillion” and “would welcome more players to boost choice” in the audit profession.

Deloitte said it recognizes the concerns raised by the committees about the concentration of the market, but believes that “a scale, multi-disciplinary model is absolutely essential” and that “audit-only firms would reduce audit quality and be detrimental to investors and the capital markets.”

Richard Adam and Zafar Khan, former chief financial officers who were singled out for criticism in the report, didn’t respond to LinkedIn messages seeking comment. Richard Howson, chief executive officer until 2017, who the report labeled “the figurehead for a business that careered progressively out of control under his misguidedly self-assured leadership,” has blamed “a few challenging contracts” in the Middle East for Carillion’s failure.

Carillion’s failure has prompted a debate in Britain about how companies are run and the extent to which the government relies on businesses to provide services. Carillion, which had contracts covering projects including hospitals and high-speed rail and had expanded rapidly over the last decade, collapsed after failing in last-ditch efforts to get support from lenders and the government.

“Carillion used aggressive accounting policies to present a rosy picture to the markets,” the committees said in the report. “Maintaining stated contract margins in the face of evidence that showed they were optimistic, and accounting for revenue for work that not even been agreed, enabled it to maintain apparently healthy revenue flows. It used its early payment facility for suppliers as a credit card, but did not account for it as borrowing. The only cash supporting its profits was that banked by denying money to suppliers.

Debt Covenants

“Whether or not all this was within the letter of accountancy law, it was intended to deceive lenders and investors,” the report said. The company would have breached its debt covenants sooner had the liabilities been classified properly, it said. Lawmakers also said Carillion executives had potentially breached British directors’ duties.

Separately, the U.K. Financial Reporting Council, a disciplinary body for accountants, said on Wednesday that it expects to review tens of thousands of documents and emails relating to its investigation of Carillion and former financial officials. It is focusing on KPMG’s audit between 2014 and 2017, including contract accounting, pensions and goodwill. The FRC investigation was opened in March.

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