Amid the continuing fallout in the wake of Carillion’s failure this past January, the company’s downfall is getting a closer look by regulators amid concerns that it “misclassified” borrowings –and not by insignificant amounts, as the tally now stands at as much as $674 million.
Bloomberg reported that the $674 million may be the amount that the firm had incorrectly identified as “other creditors” upon classifying liabilities. That charge comes from the U.K. Parliament Work and Pensions Committee, as noted in a Monday statement, which in turn relies on estimates from Moody’s.
The issues surrounding liabilities classification had been discussed by the company’s board three years ago. Some spotlights on liabilities had been tied to research from UBS Group, where the $674 million is owed to banks such as Banco Santander, “as part of a government initiative to speed up payments to suppliers.”
Under that initiative, small and medium firms that were working for Carillion could present their invoices at Banco Santander and get paid at a discounted rate, rather than wait months for Carillion’s payments. Carillion, as the newswire reported, owed the banks money, which should have been classified as borrowings. Said the Committee, “the company used its suppliers as a line of credit to shore up its fragile balance sheet, then in another of its accounting tricks ‘reclassified’ this borrowing to hide the true extent of its massive debt,” which equated to about 1.6 billion pounds.
The shockwaves will likely be considerable as the Prompt Payment Directory conglomerate said there has been a 30 percent increase year over year in the number of construction-specific firms staring into the abyss of bankruptcy, as reported last week in Rac. The rough sledding for this sector comes in the midst of a survey of 400 smaller construction firms. Of that roster, three quarters said they face “severe” financial challenges.
The Directory has said that the sharp boost in financially distressed firms comes even as “prompt payment codes” have sought to make supplier payments relatively speedier across a 45-day window. But 73 percent of construction firms have said they have been paid beyond that 45-day time period.
And Carillion is not an isolated incident — the Prompt Payment Directory has reported that the number of SME owners finding themselves in a struggle, both financially and in terms of mental health, has been on the rise.
Research across more than 1,000 business owners found that half of owners’ businesses are on the cusp of bankruptcy or outright liquidation, tied to late payments. That percentage of owners reporting distress is up 23 percent from last year. As many as 52 percent say that poor cash flow lies at the root of their troubles.
Sixty-three percent of those surveyed said that the late payments had caused those same business owners to skip “paying themselves,” while 42 percent had skipped bonuses. If customers continue the late payment trend, more than half of the owners said that the progress of their businesses would be impacted.
In separate, company-specific news, the global small business platform Xero said it has unveiled Xero Small Business Insights in New Zealand, which offers a snapshot of the economic health of smaller firms. The service analyzes data that spans cash flow, hiring practices and cross-border activity. The data, which is updated monthly, is drawn from several hundred thousand Xero subscribers. According to initial metrics cited by the company, between March 2017 to March 2018, 50 percent of smaller New Zealand firms were cash flow positive in any given month.