The U.K. government released its report into the Carillion fiasco and it’s damning, to say the least – though not unexpected.
Since the collapse of Carillion, once the nation’s second-largest construction company and a massive government supplier, fingers have been pointed in all directions. A few key themes emerged from the fallout, however, with analysts citing Carillion as a prime example of how a consolidated auditing market risks lackluster accounting standards, as well as how late payments by large corporates can have detrimental impacts on small suppliers.
Both topics, however, have captured headlines for some time. Will the Carillion collapse – and Parliament’s subsequent report condemning the company and its partners – be the final crack in crumbling foundations of corporate governance?
The Government’s Report
The Guardian broke down some of the most condemning quotes from the report, created by the Work and Pensions Committee and the Business, Energy and Industrial Strategy Committee, which examined what, exactly, went wrong when Carillion found itself in dire straits, buried in more than $2 billion in debt when it went into insolvency in January.
“The mystery is not that it collapsed, but that it lasted so long,” the report’s MP authors wrote.
“We have no confidence in our regulators.”
“The board was either negligently ignorant of the rotten culture at Carillion or complicit in it.”
And, perhaps the most daunting conclusion in the report: “Carillion could happen again, and soon.”
The report declared that Carillion’s downfall was a culmination of a “relentless dash for cash, driven by acquisitions, rising debt, expansion into new markets and exploitation of suppliers.”
Its accounting practices led to a misrepresentation of the firm’s financial health, MPs noted, while the organization’s leadership demonstrated “recklessness, hubris and greed,” boosting bonuses while financial situations worsened.
The Government’s Response
The report is urging “radical reforms to our creaking system of corporate accountability” to avoid a repeat – but calls for action are not new.
The U.K. has taken several measures to combat the issue of late supplier payments and unfair payment terms that large enterprises impose on small vendors. In the report, MPs noted that “Carillion relied on its suppliers to provide materials, services and support across its contracts, but treated them with contempt.”
Carillion suppliers have already begun to speak out against late payment practices, as they are left with bills totaling millions of dollars, and no guarantee that invoices will ever be paid. The company, which began paying its suppliers in net-120 days, was found to be using suppliers as free capital by delaying payment.
Last month, reports emerged that U.K. officials are considering expanding access for subcontractors to report late and delayed payments.
The MP’s report further recommends that the government consider breaking up the nation’s Big Four auditors. Officials found “incredibly poor standards” within Carillion’s accounting and financial management practices dubbed “aggressive.”
“Whether or not all this was within the letter of accountancy law, it was intended to deceive lenders and investors,” the report concluded.
Earlier this year, separate calls for a breakup of the nation’s accountancy industry surfaced from the Financial Reporting Council’s CEO, Stephen Haddrill, who urged officials to probe whether a Big Four breakup would improve competition in the market.
“There is a loss of confidence in audit, and I think that the industry needs to address that urgently,” Haddrill told The Financial Times in March. “In some circles, there is a crisis of confidence.”
A previous inquiry by the U.K. Competition Commission (now the Competition and Markets Authority) introduced stricter rules for the nation’s accountancy industry, but Haddrill said the initiative did not go far enough.
Financial institutions that provided financing to Carillion are facing criticism, too, with some calling for greater oversight in light of claims that banks knew for months what had been going on with the company. Soon before the firm’s collapse, Santander, RBS, Barclays, HSBC and Lloyds approved of a $200 million loan facility to the company.
The government’s report on Carillion’s collapse has heightened calls for action. But with officials already warning of the problems of late supplier payments and a lack of competition in the accountancy industry, it is unclear whether the damning report will be the spark that ignites change, or simply another call that goes unanswered.