A report into what went wrong at collapsed construction giant Carillion reads like a masterclass in failed governance, assurance, and regulatory oversight.

In the final report of its inquiry into the company’s spectacular collapse, the U.K. Parliament’s Work and Pensions, and Business, Energy and Industrial Strategy (BEIS) Committees revealed a catalogue of errors that could—and should—have been avoided.

Carillion was one of the largest contactors for U.K. government infrastructure projects, employing 43,000 people worldwide. At the time of its collapse, it left a pension liability of around £2.6 billion (U.S. $3.5 billion) and owed around £2 billion (U.S. $2.7 billion) to its 30,000 suppliers, sub-contractors, and creditors. The company went into liquidation in January with liabilities of nearly £7 billion (U.S. $9.4 billion) and just £29 million (U.S. $39 million) in cash.

Directors were “too busy stuffing their mouths with gold to show any concern for the welfare of their workforce or their pensioners.”
Frank Field MP, Chair, Work and Pensions Committee

Members of Parliament (MPs) found that the company’s business model was an “unsustainable dash for cash” and that Carillion had become “increasingly reckless in the pursuit of growth.” The report says that acquisitions “lacked a coherent strategy,” purchases were “funded through rising debt,” and expansions into overseas markets “were driven by optimism rather than any strategic expertise.”

“The Government was correct not to bail out Carillion,” the report read. “Taxpayer money should not be used to prop up companies run by such negligent directors.”

Frank Field MP, chair of the Work and Pensions Committee, said directors were “too busy stuffing their mouths with gold to show any concern for the welfare of their workforce or their pensioners.”

Among the report’s key findings:

2018 Carillion timeline

Carillion’s corporate culture was “rotten” with a “chronic lack of accountability and professionalism.”

Directors maintained the image of a healthy and successful company by increasing dividend payments year-on-year, irrespective of company performance. In fact, more was paid out in dividends than the company generated in cash.

The company’s cash flow relied on stringing suppliers out for months, despite being a signatory of the Government’s Prompt Payment Code. If contractors wanted to be paid within 45 days (as opposed to waiting 120 days), they had to agree to a cut.

The company’s succession of CEOs, FDs, and NEDs did not challenge the business model or question the underlying nature of the company’s business and maintained a “deluded” sense of optimism even though the company was “crying out for help.” Carillion’s NEDs were “unable to provide any remotely convincing evidence of their effective impact.”

Remuneration committees kept increasing salaries that were out of whack with performance. Even as the company collapsed, the committee’s priority was salary boosts and extra payments to senior leaders in the hope they wouldn’t flee the company.

Carillion deliberately used aggressive accounting policies to present a rosy picture to the markets. This meant investors were not provided with accurate information on which to base judgments about the real state of the business. When they sought to discuss their concerns about management failings with the board, they were met with “unconvincing” and “incompetent” responses.

KPMG audited Carillion for 19 years, pocketing £29 million (U.S. $39 million) in the process. Not once during that time did the audit firm qualify its audit opinion or exercise professional scepticism with regard to the financial statements.

Rival Big Four audit firm Deloitte was responsible for advising Carillion’s board on risk management and financial controls—failings in the business that proved terminal. MPs say Deloitte was either unable to identify effectively to the board the risks associated with their business practices, unwilling to do so, or the company too readily ignored them.

Other high-profile advisory firms (EY, Slaughter and May, Lazard, and Morgan Stanley) also just seemed to take the money and not change the problem. “The appearance of prominent advisors proves nothing other than the willingness of the board to throw money at a problem and the willingness of advisory firms to accept generous fees,” read the report.

Regulators also failed to monitor, intervene, or protect. The Pensions Regulator’s response was deemed “feeble” and failed in all its objectives regarding safeguarding members’ assets in the Carillion pension scheme, while MPs said the FRC was far too “passive” and “timid” in relation to Carillion’s financial reporting.

MPs have “little faith” in the ability of the FRC to complete important investigations in a timely manner, and they recommend its powers are beefed up—and used.

MPs recommend that all directors who exert influence over financial statements can be investigated and punished as part of the same investigation—not just those with accounting qualifications (presently, the FRC can only investigate directors if they have an auditing, accounting, or actuarial qualification).

In terms of lessons to be learned from the debacle, MPs say:

The current Stewardship Code, which is being revised and is supposed to enhance engagement between investors and boards and help prevent short-termism, is “insufficiently detailed to be effective,” “completely unenforceable,” and “needs some teeth.”

Regulators need to use the harsher powers they have more readily. The Pensions Regulator has never imposed a contribution schedule to compel companies to plug their pension scheme deficits, while the FRC—whose powers are currently under review—is “content with apportioning blame once disaster has struck” instead of proactively challenging companies and flagging issues early to avert business failure.

The Competition and Markets Authority, the U.K.’s competition regulator, should investigate the U.K. audit market and consider breaking up the dominance of the Big Four, as well as separating audit from other consultancy work.