The collapse of Carillion in January this year sparked discussion on a range of issues relating to accounting, audit and governance - why hadn't the auditors said more about the company's problems? Were the directors negligent? Was there something wrong with the accounts? Why weren't problems at the company dealt with sooner?
In July 2017, Carillion re-evaluated some of its contracts and wrote off £845 million in value. The company issued a profit warning and CEO Richard Howson resigned. They had significant cash flow problems - money was being transferred around the Group so that salaries and other expenses could be paid, according to one article.
Carillion's debt reached £900 million and it had a £590 million deficit on its pension plan. It breached debt covenants and needed more equity or long term finance. But no one was willing to lend without government guarantees. The share price collapsed by 90% - signalling loss in confidence in the company.
In terms of who is being blamed, it seems right that the senior management of the company take responsibility for their poor governance - which led to all of the problems reported on. From the Annual Report, it seems that risks had been properly identified, but not well managed or mitigated. External auditors KPMG are also being blamed - for not finding the problems and/or for not telling anyone about them.
What do your peers think?
- In my opinion the responsibility for the collapse rests with the management of Carillion. Auditors should have also done better to spot the problems and provide sufficient warning. Off course macro environment was challenging but the management should have started restructuring process way earlier and not wait until it was too late. The management know the state of affairs best and they are paid to look after interests of all stakeholders. The collapse of Carillion is a warning signal to others and serious changes should be considered in the way large corporations are governed.
K.K
- The business model, and therefore ultimately the board, was largely responsible. The company constantly pursued acquisitions, incurring increasing amounts of debt. Problems with large contracts resulted in the write off of over £800 million in revenue and there was no strategy to protect the company from the risk of this happening. They also adopted aggressive accounting policies and didn't follow their banks' required strategies which were put in place once profit warnings were issued. Their auditors also share some of the blame for not identifying how vulnerable their balance sheet was due to the high levels of debt. It is difficult to maintain professional scepticism when you have been the auditors for many years.
L.H
- Having worked for a PLC, there is a fine line to be drawn between adoption of policies and what the balance sheet and cash flows are telling management, the adoption of IFRS in general and the relationship with external auditors. There may be a case for auditors being too close to management, but the audit team are reliant on management to behave in an open and honest way. I suspect that this will come down to a combination of failures. A knee jerk reaction could lead to the audit profession using their own interpretation of accounting standards which from my experience has not been consistent. Or worse the FRC etc being handed over to the FCA to manage and that would to my mind be the worst of all worlds!
A.C
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