Carillion’s rise and spectacular fall was a story of recklessness, hubris and greed. Its business model was a relentless dash for cash, driven by acquisitions, rising debt, expansion into new markets and exploitation of suppliers. It presented accounts that misrepresented the reality of the business, and increased its dividend every year, come what may. Long term obligations, such as adequately funding its pension schemes, were treated with contempt. Even as the company very publicly began to unravel, the board was concerned with increasing and protecting generous executive bonuses. Carillion was unsustainable. The mystery is not that it collapsed, but that it lasted so long.
Carillion was an important company. Its collapse will have significant and as yet uncertain consequences, not least for public service provision:
Carillion’s board are both responsible and culpable for the company’s failure. They presented to us as self-pitying victims of a maelstrom of coincidental and unforeseeable mishaps. Chiefly, they pointed to difficulties in a few key contracts in the Middle East. But the problems that caused the collapse of Carillion were long in the making, as too was the rotten corporate culture that allowed them to occur. We are particularly critical of three key figures:
We recommend that the Insolvency Service, in its investigation into the conduct of former directors of Carillion, includes careful consideration of potential breaches of duties under the Companies Act, as part of their assessment of whether to take action for those breaches or to recommend to the Secretary of State action for disqualification as a director.
A system of internal and external checks and balances are supposed to prevent board failures of the degree evident in Carillion. These all failed:
Most companies are not run with Carillion’s reckless short-termism, and most company directors are far more concerned by the wider consequences of their actions than the Carillion board. But that should not obscure the fact that Carillion became a giant and unsustainable corporate time bomb in a regulatory and legal environment still in existence today. The individuals who failed in their responsibilities, in running Carillion and in challenging, advising or regulating it, were often acting entirely in line with their personal incentives. Carillion could happen again, and soon.
The economic system is predicated on strong investor engagement, yet the mechanisms and incentives to support engagement are weak. This makes regulators such as the FRC and TPR more important. The Government has recognised the regulatory weaknesses exposed by this and other corporate failures, but its responses have been cautious, largely technical, and characterised by seemingly endless consultation. It has lacked the decisiveness or bravery to pursue bold measures recommended by our select committees that could make a significant difference. That must change. That does not just mean giving the FRC and TPR greater powers. Chronically passive, they do not seek to influence corporate decision-making with the realistic threat of intervention. Action is part of their brief. They require cultural change as well.
There is a danger of a crisis of confidence in the audit profession. KPMG’s audits of Carillion were not isolated failures, but symptomatic of a market which works for the Big Four firms but fails the wider economy. There are conflicts of interest at every turn. KPMG were Carillion’s external auditors, Deloitte were internal auditors and EY were tasked with turning the company around. Though PwC had variously advised the company, its pension schemes and the Government on Carillion contracts, it was the least conflicted of the Four and could name its price as Special Manager of the liquidation. Waiting for a more competitive market that promotes quality and trust in audits has failed. It is time for a radically different approach. We recommend that the Government refers the statutory audit market to the Competition and Markets Authority. 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.
Correcting the systemic flaws exposed by the Carillion case is a huge challenge. But it can serve as an opportunity for the Government. It can grasp the initiative with an ambitious and wide-ranging set of reforms that reset our systems of corporate accountability in the long-term public interest. It would have our support in doing so.
Published: 16 May 2018