Carillion Contents

1Carillion plc

Business approach

Dash for cash


5.Carillion demerged from Tarmac in 1999. Highly ambitious, it grew quickly and expanded beyond its roots in the construction sector into facilities management. Much of this growth was driven by acquisitions. By purchasing rivals such as Mowlem and Alfred McAlpine, Carillion removed competitors for major contracts. Already the second biggest construction firm in the UK,52 Carillion attempted to become the biggest in 2014 by merging with the only larger firm, Balfour Beatty.53 This move was, however, rejected after the Balfour Beatty board dismissed Carillion’s claims that the merger would generate cost-savings of £175 million a year in “synergies”, the benefits of working together.54

6.Given Carillion’s record in achieving cost savings through mergers and acquisitions, Balfour Beatty was right to be sceptical. For example, in 2011, Carillion purchased Eaga, a supplier of heating and renewable energy services.55 Prior to the purchase, Eaga had made accumulated profits of £31 million.56 Five consecutive years of losses followed, totalling £260 million at the end of 2016.57 The disastrous purchase cost Carillion £298 million.58 This came at a time Carillion was refusing to commit further funds to addressing a pension deficit of £605 million. That problem itself was largely attributable to acquisitions: when Carillion bought Mowlem for £350 million in 2006 and Alfred McAlpine for £565 million in 2008 it also bought responsibility for their pension scheme deficits.59 It was storing up problems for the future.

7.Carillion’s spending spree also enabled one of the more questionable accounting practices which featured in its eventual demise. Carillion purchased Mowlem, Alfred McAlpine and Eaga for substantially more than their tangible net assets. The difference between the net assets and the amount paid is accounted as “goodwill”. Goodwill is the intangible assets of the company being purchased. These might include the skills and experience of the workforce, the company brand, and synergies with the purchasing company. The value of the goodwill recorded on Carillion’s balance sheet for each of those purchases was higher than the purchase prices themselves. Carillion acquired £431 million of goodwill from Mowlem, £615 million from Alfred McAlpine and £329 million from Eaga.60 As those figures are simply the arithmetic difference between the purchase price and the net tangible assets of the company, their accuracy as an assessment of the intangible assets purchased is entirely dependent on the appropriateness of the price paid. As we consider later in this report, these large and uncertain intangible assets also continued to prop up Carillion’s balance sheet for the remainder of its existence.


8.Carillion rejected opportunities to inject equity into the growing company and instead funded its spending spree through debt. Borrowing increased substantially between 2006 and 2008 as Mowlem and Alfred McAlpine were bought.61 It then almost trebled between 2010 and 2012 to help fund the Eaga purchase. The accumulation of debt, and inability to reduce it, caused concerns among Carillion’s investors. Standard Life Investments began selling its shares in the company from December 2015 onwards,62 citing a high debt burden that was unlikely to reduce in the near term due to acquisitions and a high dividend pay-out.63 As we discuss later in this chapter, in early 2015 UBS claimed total debt was higher than Carillion were publicly stating, triggering a big increase in investors short selling, or betting against, Carillion’s shares.64

Figure 1: Carillion’s total borrowing

Source: Carillion plc Annual Report and Accounts 2005–2017

9.Carillion’s growing net debt appeared to be of little concern to the board until the company was in dire straits. Keith Cochrane, non-executive director from July 2015 until becoming interim Chief Executive in July 2017, described net debt and the pension deficit as “lesser concerns” in 2015.65 Looking back, however, company directors acknowledged that their position was unsustainable. Philip Green, non-executive director from June 2011 and Chairman since May 2014,66 told us that he regretted the board “did not reduce net debt sooner” and conceded that they were too slow to explore the opportunity of raising equity rather than relying on debt.67


10.While Carillion’s acquisitions had enabled it to purchase rivals for its home turf, in Mowlem and Alfred McAlpine, and expand into the new market of energy efficiency services, in the case of Eaga, they had not delivered the returns the company had projected. Richard Howson, Chief Executive from January 2012 to July 2017, explained that the company turned its attention to bidding aggressively on contracts to generate cash:

We did not have any money to buy competitors, as we had done in the past. We had to win our work organically. We had to bid and we had to win […]68

Expansion into new markets was a key part of Carillion’s strategy, and led to ventures into Canada, the Caribbean and the Middle East as it sought opportunities for growth.

11.Carillion’s forays overseas were largely disastrous. The most notorious example was a 2011 contract with Msheireb Properties, a Qatari company, to build residential, hotel and office buildings in Doha. The project was due to complete in 2014, but remains unfinished.69 We heard claim and counter-claim from Carillion’s directors and Msheireb Properties, who each said the other owed them £200 million.70 Regardless of the true picture—and we are baffled that neither the internal nor external auditors could tell us—it is abundantly clear that the contract was not well-managed by Carillion. A July 2017 Carillion board “lessons learned” pack conceded as much, citing the company’s weak supply chain, poor planning and failure to understand the design requirements up front.71 Carillion also had difficulty adapting to local business practices. Richard Howson, who after being sacked as Chief Executive in July 2017 was retained in a new role to maintain morale and negotiate payment in key failing contracts,72 explained, “working in the Middle East is very different to working anywhere else in the world”.73

12.Carillion’s directors attempted to ascribe the company’s collapse to unforeseeable failings in a few rogue contracts. But, responding to difficulties in UK construction, Carillion knowingly entered risky new markets.74 A 2009 board strategy paper rated the Dubai market outlook as 3/10,75 but Carillion’s 2010 annual report said it would “target new work selectively” in the City.76 With reference to Carillion’s problems with Msheireb, Richard Howson told us “we only won, thankfully, one construction project in Qatar”.77 Yet Carillion bid for 13 construction contracts in that country between 2010 and 2014.78 The overriding impression is that Carillion’s overseas contract problems lay not in a few rogue deals, but in a deliberate, naïve and hubristic strategy.

13.The July 2017 lessons learned pack highlighted the breadth of problems in Carillion’s contract management.79 Andrew Dougal, Chair of the audit committee, noted there appeared to be a “push for cash at period end”, which would reflect well in published results, and “inadequate reviews on operational contracts”.80 As a large company and competitive bidder, Carillion was well-placed to win contracts. Its failings in subsequently managing them to generate profit was masked for a long time by a continuing stream of new work and, as considered later in this chapter, accounting practices that precluded an accurate assessment of the state of contracts.

14.Carillion’s business model was an unsustainable dash for cash. The mystery is not that it collapsed, but how it kept going for so long. Carillion’s acquisitions lacked a coherent strategy beyond removing competitors from the market, yet failed to generate higher margins. Purchases were funded through rising debt and stored up pensions problems for the future. Similarly, expansions into overseas markets were driven by optimism rather than any strategic expertise. Carillion’s directors blamed a few rogue contracts in alien business environments, such as with Msheireb Properties in Qatar, for the company’s demise. But if they had had their way, they would have won 13 contracts in that country. The truth is that, in acquisitions, debt and international expansion, Carillion became increasingly reckless in the pursuit of growth. In doing so, it had scant regard for long-term sustainability or the impact on employees, pensioners and suppliers.


15.Carillion’s final annual report, Making tomorrow a better place, published in March 2017, noted proudly “the board has increased the dividend in each of the 16 years since the formation of the Company in 1999”.81 This progressive dividend policy was intended to “increase the full-year dividend broadly in line with the growth in underlying earnings per share”.82 The board, most of whom were shareholders themselves,83 were expected to take into account factors including:

when determining dividend payments.84

16.In reality, Carillion’s dividend payments bore little relation to its volatile corporate performance. In the years preceding its collapse, Carillion’s profits did not grow at a steady rate, and its cash from operations varied significantly. In 2012 and 2013, the company had an overall cash outflow as its construction volumes decreased.85 But in these years the board decided not only to continue to pay dividends, but to increase them, even though they did not have the cash-flow to cover them.86

Figure 2: Carillion’s dividend payments

Source: Carillion plc annual reports and accounts 2011–2016

17.Remarkably, the policy continued right up until dividends were suspended entirely as part of the July 2017 profit warning.87 The final dividend for 2016, of £55 million, was paid just one month before on 9 June 2017.88 Former members of Carillion’s board told us that there was a “wide ranging discussion”89 and “lengthy debate” in January and February 2017 on whether to confirm that dividend.90 January 2017 board minutes show that Zafar Khan, then Finance Director, proposed withholding it to conserve cash and reduce debt. However, he faced opposition from Andrew Dougal, the Chair of the audit committee,91 and Keith Cochrane, then the Senior Independent Non-Executive Director and later interim Chief Executive. Both men expressed concerns about the message holding dividends would have sent to the market. Mr Cochrane suggested “it may be appropriate to send a message to the market about debt reduction at the right time”.92 He told us that “management were committed to reducing average net debt after paying the dividend”.93 It is clear, however, that all other considerations, including addressing the company’s ballooning debt burden, were over-ridden. The minutes of the February 2017 board meeting provide no detail of any further discussion of the dividend, but simply confirm that the board recommended a dividend of 18.45p per share.94 The right time to “send a message to the market” did not appear to come until the board issued its profit warning just over four months later.

18.Richard Adam, Finance Director from April 2007 to December 2016, told us that Carillion’s objective in dividend payments was “balancing the needs of many stakeholders”, including pensioners, staff and shareholders.95 We saw little evidence of balance when it came to pensioners’ needs. Over the six years from 2011–2016, the company paid out £441 million in dividends compared to £246 million in pension scheme deficit recovery payments.96 Despite dividend payments being nearly twice the value of pension payments, Keith Cochrane denied that dividends were given priority.97 When offered the analogy of a mother offering one child twice as much pocket money as the other, he merely noted that was an “interesting perspective”.98 Richard Adam’s defence was that from 2012–2016, dividends increased by only 12% whereas pension payments increased by 50%.99 He omitted to mention that, across his ten year stint as Finance Director, deficit recovery payments increased by 1% whereas dividends increased by 199%.100 Setting aside selective choosing of dates, there is a simpler point: funding pension schemes is an obligation.101 Paying out dividends is not. We are pleased that the Business Secretary has confirmed that his Department’s review into insolvency and corporate governance will include considering “whether companies ought to provide for company pension liabilities, before distributing profits” through dividends.102

19.Nor was it clear that shareholders agreed that Carillion achieved Richard Adam’s balance. Some investors, such as BlackRock, invested passively in Carillion because it was included in tracking indices. For them, the suspension of dividends, as with significant falls in the share prices, could lead to a company being removed from indices and trigger an automatic obligation to sell shares.103 Active investors took a more nuanced view. Standard Life Aberdeen told us that while “the dividend payment is an important part of the return to shareholders from the earnings” it was not in the investor’s interests to encourage the payment of “unsustainable dividends.”104 In December 2015, Standard Life Investments (as it then was) took the decision to begin divesting from Carillion in part because they realised Carillion’s insistence on high dividends meant it was neglecting rising debt levels.105 Murdo Murchison, Chief Executive of Kiltearn Partners, another active investor, said dividend payments that were “not sustainable” was a factor in his company choosing to divest Carillion shares:

In our analysis we baked in a dividend cut. When the market is telling you a dividend is not sustainable the market is usually right and, again, it is quite interesting in this context as to why the management were so optimistic about the business they were prepared to take a different view.106

Ultimately, any investors who held on to their shares found them worthless.

20.Mr Murchison said that, while dividends should be “a residual”, payable once liabilities had been met, there was a problem with “corporate cultures where a lot of management teams believe dividends are their priority”.107 Carillion’s board was a classic such case, showing:

desire to present to investors a company that was very cash generative and capable of paying out high sustainable dividends. They took a lot of pride in their dividend paying track record.108

Such an approach was inconsistent with the long-term sustainability of the company.

21.The perception of Carillion as a healthy and successful company was in no small part due to its directors’ determination to increase the dividend paid each year, come what may. Amid a jutting mountain range of volatile financial performance charts, dividend payments stand out as a generous, reliable and steady incline. In the company’s final years, directors rewarded themselves and other shareholders by choosing to pay out more in dividends than the company generated in cash, despite increased borrowing, low levels of investment and a growing pension deficit. Active investors have expressed surprise and disappointment that Carillion’s directors chose short-term gains over the long-term sustainability of the company. We too can find no justification for this reckless approach.

Pension schemes

Pension obligations

22.Carillion operated two main defined benefit (DB) pension schemes for its employees, the Carillion Staff and Carillion ‘B’ schemes.109 In April 2009, Carillion closed the schemes to further accruals and from that point employees could instead join a defined contribution plan.110 Carillion still retained its obligation to honour DB pension entitlements accumulated before that date. The schemes had combined deficits, the difference between their assets and liabilities, of £48 million in 2008, £165 million in 2011 and £86 million in 2013.111

23.Those deficits, while undesirable, were not unusually high by DB standards and may well have been manageable. Through its acquisitions policy, however, Carillion took on responsibility for several additional DB schemes in deficit. When the company entered liquidation in 2018, it had responsibility for funding 13 UK DB pension schemes.112 All but two of those are likely to enter the Pension Protection Fund (PPF), which pays reduced benefits to members of schemes that are unable to meet pension promises owing to the insolvency of the sponsoring employer.113 The PPF, which is part-funded by a levy on other pension schemes, will take on responsibility for both the assets of the schemes and the liability of paying the reduced pensions. The PPF estimates the aggregate deficit for PPF purposes will be around £800 million, making it the largest ever hit on its resources.114

Box 1: The Pension Protection Fund (PPF)

The PPF protects the pensions of members of DB pension schemes. If the sponsoring employer of a scheme becomes insolvent, and the schemes cannot afford to pay pensions at least equal to PPF compensation, the PPF compensates them financially for the money they have lost. PPF benefits are generally lower than in the failed scheme: if someone had already reached pension age when the company went bust, they would be paid their full pension, but will usually have lower annual indexation. Schemes members yet to reach pension age face a 10% haircut to their pensions as well. There is also a cap on annual compensation.

As well as taking on liabilities for paying reduced pensions, the PPF takes on the assets of the failed schemes. To fund pension payments, it invests those assets, seeks to recover money and other assets from the insolvent sponsors, and charges a levy on pension schemes eligible for the PPF. The levy is risk-based and acts as an insurance premium. In March 2017, the schemes insured by the PPF had a combined deficit on a PPF basis of £295 billion.

In 2018–19, the PPF expects to collect £550 million of levy in total across all eligible schemes. The hit from the Carillion schemes will be larger than that. However, the PPF has a reserve of £6.1 billion, making it “well-placed” to absorb the Carillion schemes. The PPF projects a 93% probability of being fully-funded by 2030.115

24.The most significant of the additional schemes acquired were sponsored by Mowlem and Alfred McAlpine. Mowlem was purchased in 2006, when it had a year-end pension deficit of £33 million.116 Alfred McAlpine was purchased in 2008, when it had a year-end deficit of £123 million.117 By the end of 2011, the combined deficit on these two schemes had grown to £424 million.118 On 6 April 2011, a single trustee board, Carillion (DB) Pension Trustee Ltd, was formed to act for the two main Carillion schemes, Alfred McAlpine, Mowlem and two additional schemes: Bower and the Planned Maintenance Engineering Staff schemes.119 These schemes together accounted for the large majority of both the total Carillion deficit and total pension membership.120 We focus in this report on those schemes and the negotiations between Carillion and Carillion (DB) Pension Trustee Ltd (the Trustee).

Scheme funding

25.DB pension schemes are subject to a statutory funding objective of having sufficient and appropriate assets to make provision for their liabilities.121 Actuarial valuations must be carried out at least once every three years to assess whether this statutory funding objective is met.122 If it is not, the Trustee and sponsor company are required to agree a recovery plan for how and when the scheme will be returned to full funding, including deficit recovery payments to be made by the sponsor.123 The agreed valuation and recovery plan, schedule of contributions and valuation must be submitted to The Pensions Regulator (TPR) within 15 months of the valuation.124

26.The main Carillion schemes had combined deficits of:

27.Carillion and the Trustee therefore needed to agree three recovery plans over the past decade. The 31 December 2016 valuation was, Keith Cochrane told us, “somewhat overtaken by events”126 as the company unravelled, but the Trustee expected the total deficit to be around £990 million.127

28.The 2008 valuation was a warning of things to come. Carillion and the Trustee failed to agree a valuation within 15 months, mainly because of a disagreement over the assumptions used to calculate the deficit. Carillion pushed for more optimistic assumptions of future investment returns than the Trustee considered prudent.128 Additionally, while the Trustee believed that contributions of £35 million per annum were both necessary and affordable as a minimum, Carillion said they could not afford contributions above £23 million.129 Carillion also wanted the recovery plan to be 15 years, which the Trustee noted “exceeds the 10 year maximum which the Regulator suggests is appropriate”.130 The valuation and recovery plans were eventually agreed in October 2010, seven months late, with payments averaging £26 million over a 16 year period.131 The company largely got its way.

29.The 2011 valuation reached an impasse on the same issues:

30.The Trustee’s position was supported by independent covenant advice from their advisors, Gazelle Corporate Finance. Based on the financial reports available to it, Gazelle said Carillion could increase annual contributions to above £64 million without a significant impact on available cashflow.134 It also noted Carillion had “historically prioritised other demands on capital ahead of deficit reduction in order to grow earnings and support the share price”.135 Despite the continued increases in dividends every year, the company had refused requests from the Trustee to establish a formal link between the level of dividends and pension contributions.136

31.Richard Adam, as Finance Director, argued the company could not afford such high contributions. Gazelle was sceptical of this: his pessimistic corporate projections presented to the Trustee were certainly at odds with the upbeat assessments offered to the City to attract investment.137 In retrospect, the gloomy outlook may have been more accurate. But if that was so, Carillion should not have been paying such generous dividends. Gazelle concluded that Richard Adam had an “aversion to pension scheme deficit repair funding”.138 The scheme actuary, Edwin Topper from Mercer, said Carillion’s “primary objective was to minimise the cash payments to the schemes”.139 Robin Ellison, Chair of the Trustee, observed at the time that Richard Adam viewed funding pension schemes as a “waste of money”.140

32.Despite TPR writing to both sides in June 2013 to indicate contributions in the range of £33 million - £39 million would not be “acceptable based on the evidence we have seen” - Carillion refused to increase its offer.141 In early 2014, however, a compromise was reached based on a new valuation date of 31 January 2013. Improved market conditions between those two dates had reduced the deficit to £605 million. The Trustee reluctantly accepted initial annual contributions of £33 million, in line with Carillion’s original offer and £30 million less than the Trustee originally requested. While recovery contributions were scheduled to rise to £42 million from 2022, there would be new negotiations in the meantime.142 The Carillion group would also only guarantee payments due up to end of 2017.143 Beyond then, schemes would only have recourse to individual sponsor companies within the group. It was also agreed that the next valuation, based on the position at 31 December 2013, would be based on the same assumptions and would not consider the total level of contributions.144 It is difficult to interpret this result as anything other than a victory for Carillion in its objective of minimising its contributions to the scheme. We consider the role of TPR in this outcome later in this report.

33.Following the July 2017 profit warning, Carillion was desperate to cut costs. The pension schemes were one of their main targets. The Trustee agreed to defer pension contributions worth £25.3 million due between September 2017 and April 2018, on the basis that the sponsor would otherwise have been insolvent.145 Carillion also sought to offload its pension schemes into the PPF in a bespoke deal, though it had far from sufficient funding to produce a proposal that would have been attractive to the Trustee, TPR or the PPF.146

34.Though most of them were shareholders, Carillion’s former directors were not members of the DB pension schemes. Instead, they received generous employer contributions to a defined contribution scheme. For example, Richard Howson and Richard Adam received employer contributions of £231,000 and £163,000 respectively for their work in 2016.147 The performance indicators used to determine bonus payments did not include managing the risk of pension deficits. The directors rejected accusations, however, that they did not care about funding the pension schemes. They repeatedly referred to meeting their pension obligations, meaning fulfilling the deficit recovery plan, without any regard to the lopsided negotiation that led to its agreement.148 The company ultimately reneged on that agreement, asking the Trustee to forgo payments due in a desperate effort to save the company. Fundamentally, those directors did not meet their obligations. TPR makes clear that “pensions are deferred pay and pension deficits are responsibilities of the employer”.149 Carillion failed in its obligations to honour its pension promises and to take adequate steps to address its pension deficits.

35.Honouring pension obligations over decades to come was of little interest to a myopic board who thought of little beyond their next market statement. Their cash-chasing acquisitions policy meant they acquired pension scheme deficits alongside companies. Their proposals for funding those deficits were consistently and resolutely derisory as they blamed financial constraints unrecognisable from their optimistic market announcements. Meeting the pension promises they had made to their rank and file staff was far down their list of priorities. This outlook was epitomised by Richard Adam who, as Finance Director, considered funding the pension schemes a “waste of money”.


36.Carillion relied on an extensive network of suppliers to deliver materials, services and support across its work.150 At the point of the company’s collapse, the construction trade body Build UK estimated that Carillion’s supply chain spanned 30,000 companies.151 These businesses included direct subcontractors, indirect subcontractors, and suppliers who may have been unaware that they formed part of Carillion’s supply chain until the insolvency prevented them from receiving payments owed. The Federation of Small Business (FSB) said that small suppliers had been placed in a “perilous” situation.152 The jeopardy suppliers faced at the hands of Carillion was not, however, limited to the point when the company ceased trading. We heard that the company had long been abusing its dominant market position by making small suppliers wait for payment.153 Suppliers told us that Carillion subjected them to extended delays across reporting periods and was notable for quibbling with invoices to avoid prompt payment.154

37.Carillion signed the Government’s Prompt Payment Code in 2013.155 Signatories are expected to pay suppliers on time, give clear guidance to suppliers and encourage good practice. They should pay 95% of invoices within 60 days unless there are exceptional circumstances,156 undertake to work towards 30 day payment terms, and avoid practices that adversely affect the supply chain.157

38.Despite signing the Code, Carillion had a reputation as a notorious late payer.158 In 2016, the FSB protested to the company on behalf of suppliers waiting up to 126 days to receive the payments they were owed.159 The Rt Hon Greg Clark MP, Secretary of State for Business, Energy and Industrial Strategy, said that “it is obvious that those payment terms were too long”.160 Carillion’s former directors were, however, either unaware of the use of this business practice, or unwilling to admit to it. Richard Adam, Richard Howson and Philip Green all claimed not to recognise cases of people waiting 120 to 126 days for payment.161 Emma Mercer, Carillion’s final Finance Director, told us of “a few outliers” of “about five per cent” of the supply chain were paid over 120 days and “less than ten per cent” waited 60 days.162

39.Emma Mercer’s evidence exhibited greater frankness than Carillion’s other former directors. While she accepted that suppliers were asked to sign up to 120 day payment terms, she explained that the company offered an early payment facility (EPF) option.163 She called this practice “supply chain factoring”, which is also known as “reverse factoring” or “supply chain financing”. In such an arrangement, suppliers can receive payments from a bank ahead of standard timescales, at a discounted rate. Supply chain financing has won support from industry bodies, including the FSB, and Government. In 2012, the then Prime Minister announced the Supply Chain Finance Scheme as an “innovative way for large companies to help their supply chain access credit, improve cash-flow and at a much lower cost”.164 Carillion was a founding participant in this well-intentioned initiative.

40.Carillion’s use of supply chain finance was unusual in both the harshness of the alternative standard payment terms and the extent to which the company relied on it. Shortly after the launch of the Supply Chain Finance Scheme, Carillion changed its standard payment terms to 120 days.165 Suppliers could sell their invoices at a discount to Carillion’s bank to receive their payment after 45 days. Carillion, however, would not be expected to reimburse the bank until the standard payment terms had expired, providing them with a generous repayment period. Emma Mercer told us that this was a deliberate strategy: Carillion explicitly used its EPF to avoid “damaging our working capital” and because it was vulnerable to its own customers not paying within 45 days.166 This only serves to highlight the fragility of Carillion’s business model.

Box 2: Vaughan Engineering

The collapse of Carillion will inevitably have a ripple effect through the UK construction industry and the wider economy. One of the first companies to be hit was Vaughan Engineering Ltd, which filed for administration on 28 March 2018.167 The company employed around 200 people and provided mechanical and electrical building services on large commercial building projects. They had worked extensively with Carillion over the past decade.168

Vaughan Engineering described Carillion’s collapse as the principal factor in their own downfall, though they also cited contract disputes with other contractors and inadequate Government support following Carillion’s insolvency.169 Their complaints against Carillion echo those of other suppliers who had to deal with them: standard payment terms of 120 days that could only be circumvented by use of the early payment facility, delays in the certification of payments and unsubstantiated counter claims. The company believe they were owed £830,000 by Carillion, which left them unable to cover their liabilities.170

41.At the point the company collapsed, Carillion had access to credit of up to £500 million for the “early” payment of suppliers, and was drawing around £350 million.171 That Carillion was using supply chain financing to prop itself up would be of grave concern to investors. But S&P Global, a credit ratings agency, told us that “the lack of transparency concerning Carillion’s reverse factoring practices likely obscured its weak balance sheet and cash flow position.”172 The accounting impact of this approach is considered later in this report. In the dying days of the company, Carillion considered a proposal by its restructuring consultants, EY, to extend standard payment terms to 126 days as an untapped “cash generative opportunity”.173

42.Carillion relied on its suppliers to provide materials, services and support across its contracts, but treated them with contempt. Late payments, the routine quibbling of invoices, and extended delays across reporting periods were company policy. Carillion was a signatory of the Government’s Prompt Payment Code, but its standard payment terms were an extraordinary 120 days. Suppliers could be paid in 45 days, but had to take a cut for the privilege. This arrangement opened a line of credit for Carillion, which it used systematically to shore up its fragile balance sheet, without a care for the balance sheets of its suppliers.

43.We welcome that as part of Carillion’s insolvency, the Official Receiver has sought to improve payment terms for goods and services provided during and for the benefit of the liquidation. They have reduced terms to “there or thereabouts, within 30 days of invoice rather than the 120 days that [we] have heard”.174This does not, however, benefit those suppliers who remain unpaid for goods and services before the collapse of the company. The vast majority of those were uninsured and have joined the long list of creditors unlikely to see anything they were owed.175

Corporate governance

44.Corporate governance is the process by which a company is directed and controlled.176 Its purpose is “to facilitate effective, entrepreneurial and prudent management that can deliver the long-term success of the company”.177 The UK Corporate Governance Code, held by the Financial Reporting Council (FRC), states that the “underlying principles of good governance [are] accountability, transparency, probity and a focus on the sustainable success of an entity over the longer term”.178 Philip Green told us that Carillion’s board upheld these standards, describing a culture of “honesty, openness, transparency and challenging management robustly, but in a supportive way”.179

45.The documents we saw, however, showed a very different picture:

46.Carillion’s management lacked basic financial information to do their job. A January 2018 review by FTI Consulting for Carillion’s lenders found the “presentation and availability of robust historical financial information”, such as cash flows and profitability, to be “extremely weak”.184 This accorded with a presentation by Keith Cochrane to the board on 22 August 2017 which identified “continued challenges in quality, accessibility and integrity of data, particularly profitability at contract level”.185 For a major contracting company, these are damning failings.

47.Such problems were not restricted to financial information. When it collapsed in January 2018, the total group structure consisted of 326 companies, 199 based in the UK,186 of which 27 are now in compulsory liquidation.187 Sarah Albon, Chief Executive of the Insolvency Service, told us that the company’s “incredibly poor standards” made it difficult to identify information that should have been “absolutely, straightforwardly available”, such as a list of directors.188 Responsibility for ensuring the company is run professionally is the responsibility of the board. Stephen Haddrill, Chief Executive of the FRC, said “there must be enormous cause for concern about how the company was governed”.189

48.Corporate culture does not emerge overnight. The chronic lack of accountability and professionalism now evident in Carillion’s governance were failures years in the making. The board was either negligently ignorant of the rotten culture at Carillion or complicit in it.

Key board figures

49.Carillion was governed by a seven-member board, comprising the company’s Chief Executive, Finance Director and five non-executive directors.190 Immediately prior to the company’s profit warning in July 2017, the members were Richard Howson (Chief Executive), Zafar Khan (Finance Director), Philip Green (non-executive Chairman), and Keith Cochrane, Andrew Dougal, Alison Horner and Baroness Morgan of Huyton as non-executive directors. By the collapse of the company Mr Howson and Mr Khan were no longer in post, replaced by Keith Cochrane and Emma Mercer respectively.191 Over the course of the inquiry, we have sought evidence from and about Carillion’s board and their central role in the collapse of the company.

Richard Howson

50.Richard Howson joined the Carillion board in December 2009 and was Chief Executive from 1 January 2012 until his sacking as the company issued its profit warning on 10 July 2017. He stayed on in a lesser role before leaving in September 2017, though he continued to receive his full, contractual salary until the company entered liquidation.192 Mr Howson had been at the company since its formation in 1999, and the 2016 annual report highlighted his “detailed knowledge of key business units”.193 In evidence to us, however, he sought to distance himself from problems in the company that were “from the long term and from a long time ago”.194 He joined the board after the acquisitions of Mowlem and Alfred McAlpine (but before Eaga) and stressed that he had moved from a role responsible for Middle East construction when Carillion signed its contract with Msheireb.195

51.Mr Howson demonstrated little grasp of the unsustainability of Carillion’s business model or the basic failings of governance that lay at the root of its problems. He opened his evidence by stating that “but for a few very challenging contracts, predominantly in the Oman and one in Qatar, I believe Carillion would have survived”.196 He even seemed surprised to have been removed as Chief Executive following the profit warning, arguing “the business was in a sustainable position” based on support it was receiving from banks.197 In his world, Carillion was a healthy business that fell victim to a series of unforeseeable events over which it had no control.

52.In fact, Mr Howson had a responsibility to ensure he was well informed about performance and risk, and to act on areas of weakness. Rather than make the fundamental changes needed, however, he spent much of his time chasing down the consequences of the company’s mistakes. As Chief Executive, he told us “probably 60% of my time was either on cash calls or, a lot of time, out and about around contracts collecting”.198 He said he “felt like a bailiff” as he visited Qatar ten times a year for six years, “just to try to collect cash” from a single contract.199 He was retained after his sacking with responsibilities for collecting cash on key contracts and boosting morale in the UK construction business.200 We do not doubt that Mr Howson could be an effective cheerleader: he clearly had great affection for what he told us was “a great business”.201 However, as the leader of the company, he was either unaware of the significant, long-term problems it was facing, or chose not to act on them.

53.Richard Howson, Carillion’s Chief Executive from 2012 until July 2017, was the figurehead for a business model that was doomed to fail. As the leader of the company, he may have been confident of his abilities and of the success of the company, but under him it careered progressively out of control. His misguided self-assurance obscured an apparent lack of interest in, or understanding of, essential detail, or any recognition that Carillion was a business crying out for challenge and reform. Right to the end, he remained confident that he could have saved the company had the board not finally decided to remove him. Instead, Mr Howson should accept that, as the longstanding leader who took Carillion to the brink, he was part of the problem rather than part of the solution.

Keith Cochrane

54.Keith Cochrane was appointed to the Carillion board as Senior Independent Non-Executive Director (NED) on 2 July 2016.202 He came with extensive board-level experience, yet quickly succumbed to the dysfunctionality prevalent on the board.203 He, and the board, were aware of concerns from shareholders about the company’s net debt and its pensions deficit. The board minutes, however, show little sign of these positions being properly challenged and there was no general change of approach until the profit warning.204 Mr Cochrane said that he sought to challenge executives, “in an appropriate manner”,205 but also believed there was “no basis” in 2016 for “not accepting the view that management put forward”.206 In evidence to us, Mr Cochrane asked himself “should the board have been asking further, more probing questions?” but, even aware of the fate of the company and with hindsight, he could only respond “perhaps.”207

55.When Richard Howson was sacked as Chief Executive in July 2017, the board on which Mr Cochrane already served asked him to step into the role on an interim basis. He began to recognise some problems the company faced, extending the size of the provision made in the profit warning, and admitting—to the board at least—that the company had cultural problems. Mr Cochrane told us that Carillion was “a business worth fighting for”,208 but in giving investors “limited and vague” answers to “fairly fundamental questions” about the company, he reinforced their concerns and contributed to a continued sell-off of shares.209 In October 2017, Carillion appointed a permanent successor as Chief Executive from outside the company. His start date was brought forward to 22 January 2018 “to ensure the long-term sustainability of UK industry”. By then, the company was already in liquidation.210

56.Keith Cochrane was an inside appointment as interim Chief Executive, having served as a non-executive on the board that exhibited little challenge or insight. He was unable to convince investors of his ability to lead and rebuild the company. Action to appoint new leadership from outside Carillion came far too late to have any chance of saving the company.

Non-executive directors

57.Carillion’s five NEDs had the same legal duties, responsibilities and potential liabilities under the Companies Act 2006 as their executive counterparts.211 The distinction is that NEDs are responsible for constructively challenging the executives responsible for the day-to-day running of a company, and develop proposals for strategy. The Corporate Governance Code states:

Non-executive directors should scrutinise the performance of management in meeting agreed goals and objectives and monitor the reporting of performance. They should satisfy themselves on the integrity of financial information and that financial controls and systems of risk management are robust and defensible.212

58.The Carillion NEDs who gave evidence to us told us they performed well in this role. Alison Horner, a NED from December 2013 until the company’s collapse, said “we were there to provide oversight and challenge, and we were able to do that effectively”.213 Philip Green, a NED since June 2011 and non-executive Chairman since May 2014, agreed, saying “we challenged; we probed; we asked”.214 When we asked him for a concrete example of this challenge, he cited the company’s level of debt in 2016 and 2017, stating “the board consistently challenged management on debt, and management then developed a so-called self-help plan to reduce debt”.215 Yet debt rose from £689 million to £961 million over that period.216 Mr Green also pointed to board scrutiny of how executives were managing large, failing contracts:

Some people challenged by sending questions in advance by email; some people challenged in the meeting. I would say that it was a board that constructively challenged management.217

However, Mr Green later cited those same contracts as a “very significant factor” in the company’s collapse.218 Murdo Murchison, of former Carillion shareholder Kiltearn Partners, doubted whether the non-executive directors had been able “to exercise any effective check on the executive management team. It appears that they were hoodwinked as much as anybody else”.219

59.Non-executives are there to scrutinise executive management. They have a particularly vital role in challenging risk management and strategy and should act as a bulwark against reckless executives. Carillion’s NEDs were, however, unable to provide any remotely convincing evidence of their effective impact.

Philip Green

60.Philip Green joined the Carillion board as Senior Independent NED in June 2011 and became Chairman in May 2014. He was an experienced member of corporate boards.220 He also had experience of failing companies: he was Managing Director of Coloroll before it went into receivership in June 1990, following which, in 1994, the Pensions Ombudsman made a finding of breach of trust and maladministration against him.221 In 2011 he was appointed as a corporate responsibility adviser to the then Prime Minister, a role he left in 2016.222

61.The UK Corporate Governance Code says that a company’s Chairman is “responsible for leadership of the board and ensuring its effectiveness on all aspects of its role”.223 In this position, Philip Green oversaw low levels of investment, declining cash flow, rising debt and a growing pension deficit. Yet his board agreed year-on-year dividend increases and a rise in remuneration for his executive board colleagues from £1.8 million to £3.0 million.224 Mr Green was still at the helm when the company crashed in January 2018.

62.Mr Green appears to have interpreted his role as Chairman as that of cheerleader-in-chief. His statement in the 2016 Annual Report and Accounts, signed on 1 March 2017, just four months before the profit warning, concluded:

Given the size and quality of our order book and pipeline of contract opportunities, our customer-focused culture and integrated business model, we have a good platform from which to develop the business in 2017.225

Even more remarkably, on Wednesday 5 July 2017, a few days before the Monday 10 July profit warning, Carillion board minutes recorded:

In conclusion, the Chairman noted that work continued toward a positive and upbeat announcement for Monday, focusing on the strength of the business as a compelling and attractive proposition [ … ]226

The Monday announcement comprised a £845 million write-down. It is difficult to believe the Chairman of the company was not aware of the seriousness of its position, but equally difficult to comprehend his assessment if he was.

63.In his evidence to us, Philip Green accepted, as Chairman, “full and complete” responsibility for the collapse of the company.227 He clarified, however, that he did “not necessarily” accept culpability,228 and that it was not for him to say who was culpable.229 His company, however, assigned culpability in sacking Richard Howson, Zafar Khan, and “several other members of senior management”.230 Subsequent market announcements and the group’s January 2018 business plan referred optimistically to the “new leadership team”, a “refreshed” executive team and a “bolstered” board. Indeed, in a letter to the Cabinet Office on 13 January 2018, Mr Green reassured the Government that “the previous senior management team have all exited the business”.231 He, however, was to remain at the head of the proposed new board.232

64.Philip Green was Carillion’s Chairman from 2014 until its liquidation. He interpreted his role as to be an unquestioning optimist, an outlook he maintained in a delusional, upbeat assessment of the company’s prospects only days before it began its public decline. While the company’s senior executives were fired, Mr Green continued to insist that he was the man to lead a turnaround of the company as head of a “new leadership team”. Mr Green told us he accepted responsibility for the consequences of Carillion’s collapse, but that it was not for him to assign culpability. As leader of the board he was both responsible and culpable.

Remuneration committee

65.Carillion’s board and its remuneration committee (RemCo) attempted to present its remuneration policy as unremarkable. RemCo Chair, Alison Horner, told us that its policy was for executive pay to be “mid-table”, the industry median.233 Benchmarking analysis commissioned from Deloitte by the RemCo in 2015 showed Carillion paid relatively low total Chief Executive remuneration.234 As a result of this benchmarking, Richard Howson’s basic salary was increased by 8% in 2015 and 9% in 2016.235 His total remuneration jumped from what he recalled to us as “something like £1.1 million or £1.2 million” to £1.5 million in 2016.236 Philip Green was awarded a 10% increase in his fees as Chairman in 2016, from £193,000 to £215,000, again based on benchmarking.237 Carillion’s wider comparable workforce received just a 2% pay rise in 2016.238

66.Remuneration based on industry medians generates a ratchet effect: by raising their pay to the median, companies increase the median itself. This method of reward can also detach pay from the performance of both the individual and the company. The generous increases paid to Mr Howson, Mr Green and other senior staff in 2015 and 2016 came despite declines in the company’s share price.239 Remuneration for Carillion’s senior leaders included the potential for an annual bonus of up to 100% of basic pay, split evenly between financial and other objectives.240 In 2016, Mr Howson received a bonus of £245,000 (37% of his salary) despite meeting none of his financial performance targets.241 Murdo Murchison of Kiltearn Partners described this as a “complete disconnect” between financial performance and pay. He said the policy gave the board “a great deal of freedom to pay what they want to pay” to directors who failed to meet “fairly easy” financial targets.242

67.The RemCo told Carillion’s shareholders in December 2016 that it intended to increase the maximum bonus available to 150% of salary, to “attract and retain Executive Directors of the calibre required”.243 Investors such as BlackRock protested in private about these changes,244 and the RemCo was forced to abandon its plans in March 2017.245 Nonetheless, at Carillion’s 2017 Annual General Meeting, around 20% of investors voted against the motion to approve the board’s remuneration report. Kiltearn noted the continued growth of Richard Howson’s pay as a cause.246 In the RemCo and board papers we have seen, there is no evidence that the sizeable opposition to the remuneration policy prompted any reassessment of their general approach.

68.This was evidenced by the RemCo’s remarkable decisions at the time crisis publicly struck the company. Amra Balic, Managing Director at BlackRock, told us that, at the time of the 10 July 2017 profit warning, Carillion’s board was “thinking again how to remunerate executives rather than what was going on with the business”.247 RemCo papers from 9 July 2017, the day before the first profit warning, show it agreed to offer retention payments to five senior employees to remain with the company until 30 June 2018, and salary increases of between 25 and 30% “in the light of the very considerable burden likely to fall on certain roles”.248 It also took the decision to pay the new interim Chief Executive (and former member of the RemCo) Keith Cochrane a fee of £750,000 for the role, notably higher than his predecessor’s basic pay.249

69.An effective board remuneration policy should have the long-term success of the company as its only goal. Carillion’s RemCo was responsible for a policy of short-term largesse. In the years leading up to the company’s collapse, Carillion’s remuneration committee paid substantially higher salaries and bonuses to senior staff while financial performance declined. It was the opposite of payment by results. Only months before the company was forced to admit it was in crisis, the RemCo was attempting to give executives the chance for bigger bonuses, abandoned only after pressure from institutional investors. As the company collapsed, the RemCo’s priority was salary boosts and extra payments to senior leaders in the hope they wouldn’t flee the company, continuing to ensure those at the top of Carillion would suffer less from its collapse than the workers and other stakeholders to whom they had responsibility. The BEIS Committee is considering some of these issues as part of its current inquiry into fair pay.250


70.In 2014, the Financial Reporting Council’s UK Corporate Governance Code introduced a requirement for performance-related remuneration policies for executive directors to include “clawback” provisions. These enable bonuses to be recovered,251 in circumstances set individually by companies.252 In February 2015, in response to this change, the Carillion RemCo agreed a policy that enabled clawback if the company’s accounts needed to be restated, or if the director was guilty of gross misconduct.253 It set the RemCo as the arbiter of whether, and the extent to which, clawback applied.

71.Following the collapse of Carillion, the company was criticised for having overly restrictive clawback terms.254 Alison Horner, Chair of the RemCo, denied this accusation and said the terms made it easier to claw back bonuses.255 Ms Horner also told us that misstatement and misconduct were used as clawback terms are used by “80% of the FTSE”.256 However, a sample of clawback terms from 2015 shows that many companies, including those on which Carillion directors were also board members, also included “serious reputational damage” as a criteria for clawback.257 It is unclear why Carillion did not include reputational damage in its terms, and unlikely Ms Horner was unaware of its use elsewhere, including for executives at Tesco plc, where she is Chief People Officer.258 Furthermore, the RemCo considered new clawback terms recommended by Deloitte, “to reflect current best practice”, in September 2017 as part of its search for a new Chief Executive.259 Minutes of that meeting show the RemCo agreed new triggers for clawback, including reputational damage, failures of risk management, errors in performance assessments and information, and any other circumstances in which the RemCo believed to be similar.260

72.These new terms were too late to affect the bonuses given to directors in previous years, who remained on the weak original terms. In the same meeting as the new terms were agreed, the RemCo considered asking directors to return their 2016 bonuses, but concluded “that could not be enforced and would be very difficult to achieve at this stage”.261 We regret that the RemCo had neither set terms that could have made clawback possible, nor shown a willingness to challenge directors on their pay-outs. We agree with the suggestion by Amra Balic of BlackRock to us that standard legal language around clawbacks applicable to every company would make enforcement more likely.262 Of course, the Carillion directors could have returned their bonuses voluntarily.

73.Nowhere was the remuneration committee’s lack of challenge more apparent than in its weak approach to how bonuses could be clawed back in the event of corporate failures. Not only were the company paying bonuses for poor performance, they made sure they couldn’t be taken back, feathering the nests of their colleagues on the board. The clawback terms agreed in 2015 were so narrow they ruled out a penny being returned, even when the massive failures that led to the £845 million write-down were revealed. In September 2017, the remuneration committee briefly considered asking directors to return their bonuses, but in the system they built such a move was unenforceable. If they were unable to make a legal case, it is deeply regrettable that they did not seek to make the moral case for their return. There is merit in Government and regulators considering a minimum standard for bonus clawback for all public companies, to promote long-term accountability.

Alison Horner

74.Alison Horner presided over those remuneration and clawback policies. She joined the Carillion board as a NED in December 2013, and was appointed Chair of the RemCo in May 2014.263 She is also Chief People Officer at Tesco plc, where she has responsibilities for over 500,000 members of staff.264 When we challenged Ms Horner about the RemCo’s decisions under her leadership, she stressed that shareholders were consulted on remuneration. She did not, however, mention to us any of the concerns that shareholders told us they had expressed.265 When we asked Ms Horner about large pay increases, she pointed to a decision to offer median pay, but did not offer any justification for further detaching pay from performance.266 When we sought Ms Horner’s explanation for the company’s weak clawback terms, she dismissed the concerns of the Institute of Directors and the FRC.267 She also showed no indication that she believed she had made any mistakes. Other than being “sorry for what has happened,” she accepted no culpability as a long-serving member of the board.268

75.A non-executive director and chair of Carillion’s remuneration committee for four years, Alison Horner presided over growing salaries and bonuses at the top of the company as its performance faltered. In her evidence to us, she sought to justify her approach by pointing to industry standards, the guidance of advisors, and conversations with shareholders. She failed to demonstrate to us any sense of challenge to the advice she was given, any concern about the views of stakeholders, or any regret at the largesse at the top of Carillion. Ms Horner continues to hold the role of Chief People Officer of Tesco, where she has responsibilities to more than half a million employees. We hope that, in that post, she will reflect on the lessons learned from Carillion and her role in its collapse.

Financial reports

76.Accurate and timely financial reports and accounts of companies are essential to the functioning of the economy. They are relied upon by lenders, investors and all other stakeholders in a business. One of the fundamental concepts of accounting is that accounts are prepared on a true and fair basis. The Companies Act 2006 states that company directors must not approve accounts unless they are satisfied they give a true and fair view of the assets, liabilities, financial position and profit or loss of the company.269 In turn, the auditor gives an opinion as to whether the accounts are true and fair and free from material misstatement.

Financial performance up to July 2017

77.Until July 2017, there was little public information to suggest that Carillion’s accounts, which were signed off with an unmodified opinion each year by KPMG as auditor, presented anything other than a true and fair picture of the company’s finances. They showed a profitable company. After a sustained fall following the financial crisis in 2008, revenue had grown strongly. Earnings per share had also increased steadily since 2014. Carillion’s profit margins, while unspectacular at around 5–6%, were still “attractive relative to peers”.270

Figure 3: Carillion’s total revenue

Source: Carillion plc Annual Report and Accounts 2005–2016

78.There were, however, indicators of underlying problems. Most notably, borrowing had increased rapidly, from £242 million in December 2009 to £689 million in December 2016.271 This contributed to a big spike in the company’s debt to equity ratio, which reached 5.3 by December 2016, considerably above the ratio of 2 widely considered acceptable.272 The company also had a low level of working capital: its ratio of current assets to current liabilities remained static at around 1.0 between 2013 and 2016. Anything lower than 1.2 is potentially indicative of a company in financial difficulty.273

Figure 4: Carllion’s working capital ratio

Source: Analysis of Carillion plc’s Annual Report and Accounts 1999–2016

July 2017 trading update

79.On 10 July 2017, Carillion issued a sudden profit warning. It announced that it would reduce the value of several major contracts by a total of £845 million in its interim financial results, due in September.274 When those results were published, the write-down went further: £200 million extra was added, completely wiping out the company’s last seven years of profits and leaving it with net liabilities of £405 million. Borrowing had risen dramatically again, to £961 million. The goodwill recognised on the balance sheet was reduced by £134 million and the company’s working capital ratio fell to 0.74.275 The announcement was an extraordinary reassessment of Carillion’s financial health.

Figure 5: Carillion’s last 7 years’ profits wiped out by 2017 provision

Source: Analysis of Carillion plc’s annual report and accounts 2010–2017

Figure 6: Carillion’s total equity

Source: Carillion plc’s Annual Report and Accounts 2005-2017

80.The stock market did not wait for the full interim results to pass judgement; the share price fell by 70% from 192p on Friday 7 July to 57p by Wednesday 12 July. The share price never recovered, falling to 14p by the time the company eventually filed for liquidation on 15 January 2018.276

Aggressive accounting

81.As the dust settled, many analysts and investors began to question whether it had all been too good to be true in the first place. The August 2017 Carillion audit committee papers show that, as investors shied away from offering further equity to the company, a common question was emerging:

Many have questioned the timing of the provision. Surely management had known these contracts had been problematic for a while?277

Kiltearn Partners, which owned over 10% of Carillion’s shares at the time the provision was announced, was very critical of the timing of the profit warning. They argued that changes of that magnitude do not generally materialise “overnight” and that there are “clear grounds for an investigation into whether Carillion’s management knew, or should have known, about the need for a £845 million provision”.278 Euan Stirling, of Aberdeen Standard Investments,279 concurred, saying “these things do not happen over a short period of time”.280

82.The provision conceded that £729 million in revenue that Carillion had previously recognised would not be obtainable.281 This led to accusations that Carillion was engaged in “aggressive accounting”, stretching what is reasonably allowed by accounting standards to recognise as much revenue upfront as possible. Sir Amyas Morse, Comptroller and Auditor General (C&AG), told the Liaison Committee that “when all the drains have been pulled up on Carillion we will see some pretty aggressive accounting practices”.282

Revenue accounting

83.What would aggressive accounting look like for a company like Carillion? Much of Carillion’s revenue came from construction contracts that are inherently difficult to account for. Accruals accounting dictates revenue should be recognised when it is earned, not when it is received. For construction projects spanning several years, this means companies must assess how far to completion their projects are. This is usually done by reference to the costs incurred to date as a percentage of the total forecast costs of the project.283 Applying that percentage to the initially agreed contract price produces the revenue recognised.284 This puts a great emphasis on total estimated costs of a project. As KPMG’s audit report on Carillion’s 2016 annual report notes, “changes to these estimates could give rise to material variances in the amount of revenue and margin recognised”.285 A company wanting to indulge in aggressive accounting would make every effort to minimise the estimates of total final costs to ensure that margins on contracts are maintained and greater amounts of revenue are recognised up front.

84.Deloitte, Carillion’s internal auditors, explained that the company had two processes to review margins reported by site teams:286

i)monthly Project Review Meetings (PRMs) at which a management contract appraisal could adjust the site team’s position; and

ii)peer reviews to “provide challenge to the financial, operational and commercial performance of contracts”.

85.In July and August 2017, Deloitte examined peer reviews conducted between January 2015 and July 2017 of the contracts which made up the £845 million provision. They found that management contract appraisals tended to report higher profit margins than peer reviews.287 In 14% of cases, the peer review recommended a higher margin. In 42% of cases, three times as many, management used higher margins than recommended by the peer reviews.288

86.Deloitte noted that the differences between the two assessments were far from trivial: in more than half the cases where the peer review recommended a lower margin, the difference exceeded £5 million.289 A November 2016 peer review of the Royal Liverpool University Hospital contract suggested a loss of 12.7%, compared with the contract appraisal margin of 4.9% profit.290 The result was that the annual accounts published in March 2017 recognised approximately £53 million in revenue in excess of what would have appeared had the peer review estimate been used.291 The July 2017 profit warning included a provision of £53 million against that contract.292

Box 3: Case study: the Royal Liverpool Hospital contract

A private finance initiative contract for the design and construction of the Royal Liverpool Hospital was agreed by The Hospital Company (Liverpool) Ltd and The Royal Broadgreen University Hospitals NHS Trust on 13 December 2013. On the same date, The Hospital Company (Liverpool) Ltd awarded Carillion Construction Ltd (CCL) a five year, £235 million contract for design and construction.293

CCL began construction work in February 2014, with phase 1 due to be completed by 31 March 2017. As early as May 2015, however, delays were reported due to asbestos, pushing back expected completion to 30 June 2017.294 Carillion’s Major Project Status Report in October 2015 acknowledged this delay but estimated a final profit margin of 5.5%, 2% more than their initial bid estimate.295

In November 2016, two cracks were discovered in concrete beams at the hospital. Following a review commissioned by CCL, less significant cracks were discovered in six further beams. Richard Howson told us that Carillion deserved credit for their actions, because “we did not just cover it up. We properly rectified, even though it cost, and those beams would probably never fail in their cracked state”.296 However, Charles McLeod, Director of the Hospital Company, told us that five of the eight defective beams could have failed under the load of a fully operational hospital. He said failure to remedy the defects “could have resulted in at best, unsafe working conditions and at worst, injury and loss of life”.297

Richard Howson said that the costs associated with rectifying the cracked beams occurred in the second quarter of 2017 and added “over £20 million of cost to our completion”.298That may tally with Carillion’s public unravelling but it does not accord with Carillion’s own review process. A November 2016 peer review of the contract concluded that additional costs meant it was making a loss of 12.7%. Senior management disagreed, despite having evidence of the cracked beams alongside continued issues with asbestos, and recorded an expected profit margin of 4.9%. That led to approximately £53 million in additional revenue being recognised in the 2016 accounts, the same amount that the company eventually made a provision for on that contract in July 2017.

Carillion’s insolvency has significantly delayed completion of the hospital. The Hospital Company has entered negotiations with alternative contractors and is working to agree a revised timetable for completion.299

87.Andrew Dougal, Chair of Carillion’s audit committee, said he was unaware of these variances and first heard of them when Michael Jones, the Deloitte Partner responsible for Carillion’s internal audit, raised them with him in September 2017.300 Michael Jones confirmed this and said Andrew Dougal was “concerned that these differences did not appear to have been followed up by management”.301 Andrew Dougal conceded that “in hindsight, it would have been helpful for the audit committee to have this information so it could have factored it into its challenge of management’s judgements”.302

88.Carillion also recognised considerable amounts of construction revenue that was “traded not certified”. This was revenue that clients had not yet signed off, such as for claims and variations, and therefore it was inherently uncertain whether payment would be received. In December 2016, the company was recognising £294 million of traded not certified revenue, an increase of over £60 million since June 2014, and accounting for over 10% of total revenue from construction contracts.303 The amount of revenue that was traded not certified was never publicly disclosed in financial statements, but was included in papers reviewed quarterly by the audit committee.

89.Zafar Khan, who signed off the 2016 accounts, said he did “not agree that there was a concerted effort to adopt aggressive accounting as such” and that the numbers reported “were appropriate, based on the information that was available at that point in time”.304 As part of a contract review that led to the July 2017 provision, management were asked by KMPG to consider whether the results indicated that the 2016 accounts had been misstated due to either fraud or error. The position the board chose to adopt publicly was that there was no misstatement and that the provisions all related to the sudden deterioration of positions on key contracts between March and June 2017.305

90.Carillion’s problems were not, however, restricted to just a few contracts: September 2017 audit committee papers showed that at least 18 contracts suffered losses over the March-June period.306 Internal board minutes show the board were aware of concerns about aggressive accounting methods. A June 2017 lessons learned board meeting minute noted that “management need to be aware that high-level instructions such as that to ‘hold the position’ (i.e. maintain the traded margin) may, if crudely implemented, have unintended consequences”.307 Those minutes show that Andrew Dougal identified a “hold back of bad news”, with regard to one major contract.308 He subsequently told us the contract in question was the Royal Liverpool Hospital.309 A board minute from August 2017 notes concerns from Keith Cochrane that long-serving staff in the business had a tendency to turn a blind eye to such practices. While there were corporate incentives to present a hugely optimistic picture, there were also individual incentives for staff rewarded on the basis of published results. March 2015 board minutes show the board was concerned that potential clawback of their bonuses should not include “retrospective judgements on views taken on contracts in good faith”.310

Accounting for the early payment facility

91.It is not only Carillion’s revenue accounting that has been called into question since the company collapsed. Two major credit ratings agencies, Moody’s and Standard & Poor’s, claimed that Carillion’s accounting for their early payment facility (EPF) concealed its true level of borrowing from financial creditors.311 They argue the EPF structure meant Carillion had a financial liability to the banks that should have been presented in the annual account as “borrowing”. Instead Carillion choose to present these as liabilities to “other creditors”. Moody’s claim that as much as £498 million was misclassified as a result, though Carillion’s audit committee papers show the actual figure drawn was slightly lower at £472 million.312

92.The Financial Reporting Council (FRC) would not confirm whether they agreed with this assessment.313 They set out the relevant accounting standards and noted that the precise terms of any supply chain financing arrangement will dictate how it is accounted for. They did write, however, that they “encourage disclosure of complex supply chain arrangements”.314 Carillion’s financial statements did not highlight the EPF.315 Some analysts, however, spotted it.316 Carillion’s board minutes in April 2015 refer to “disappointing” UBS analysis that had factored both the pension deficit and the EPF in Carillion’s total debt position. The May 2015 minutes state that the shorting (betting against) Carillion shares was up significantly and that the “bulk had followed the UBS note in March”.317

93.Carillion’s classification of the EPF was advantageous to its presentation of its finances in two main ways. First, presenting drawing on the EPF as “other creditors” excluded it from total debt. It was consequently not incorporated in a debt to earnings ratio which was a key covenant test between Carillion and its lenders.318 Carillion announced in its third profit warning on 17 November 2017 that it was likely to breach that covenant.319 Had £472 million been classified as debt, it would most likely have breached this covenant test far earlier.

94.Second, Carillion’s EPF treatment helped hide its failure to generate enough cash to support the revenues it was recognising. Carillion had a target of 100% cash conversion: for cash inflows from operating activities to at least equal underlying profit from operations. It consistently reported that it was meeting this target.320 It could do this because the EPF classification allowed it, in cashflow statements, to present bank borrowing as cash inflow from operations, rather than from financing activities.321 Moody’s found that between 2013 and 2016, Carillion reported cash inflows from operations of £509 million, a conversion rate of over 100% on group operating profit of £501 million.322 But reclassifying EPF inflows of £472 million as financing activities would mean out of an operating profit of £501 million, only £37 million was cash-backed, a conversion rate of 7%. This exposes Carillion’s accounting revenue practices: revenue will at times correctly be recognised before the cash comes in, but as the C&AG said, “if your cash never really comes in, that may be a sign that you need to look about how you have been accounting for these businesses”.323

95.The Carillion board have maintained that the £845 million provision made in 2017 was the unfortunate result of sudden deteriorations in key contracts between March and June that year. Such an argument might hold some sway if it was restricted to one or two main contracts. But their audit committee papers show that at least 18 different contracts had provisions made against them. Problems of this size and scale do not form overnight. A November 2016 internal peer review of Carillion’s Royal Liverpool Hospital contract reported it was making a loss. Carillion’s management overrode that assessment and insisted on a healthy profit margin being assumed in the 2016 accounts. The difference between those two assessments was around £53 million, the same loss included for the hospital contract in the July 2017 profit warning.

96.Carillion used aggressive accounting policies to present a rosy picture to the markets. Maintaining stated contract margins in the face of evidence that showed they were optimistic, and accounting for revenue for work that not even been agreed, enabled it to maintain apparently healthy revenue flows. It used its early payment facility for suppliers as a credit card, but did not account for it as borrowing. The only cash supporting its profits was that banked by denying money to suppliers. Whether or not all this was within the letter of accountancy law, it was intended to deceive lenders and investors. It was also entirely unsustainable: eventually, Carillion would need to get the cash in.

Carillion’s finance directors

97.Responsibility for the preparation of the accounts lies collectively with the board, which may delegate that task to the Finance Director. Richard Adam was Carillion’s Finance Director from 2007 until he retired at the end of 2016. He was replaced by Zafar Khan, previously the Group Financial Controller, who only lasted nine months before being sacked. Mr Khan was replaced in September 2017 by Emma Mercer, who remained in post until the company collapsed.324

Emma Mercer

98.Emma Mercer was the only director prepared to concede that Carillion were engaged in aggressive accounting. She told us that when she returned to the UK in April 2017, having spent three years in the Canadian part of the business, there was a “slightly more aggressive trading of the contracts than I had previously experienced in the UK”.325 In further correspondence, she elaborated this could be seen in the “number and size of contracts where significant judgements were being made in relation to the recognition of uncertified revenue in construction contracts”.326

99.Ms Mercer appeared to bring a level of discipline and accuracy to Carillion’s accounting policies that had been severely lacking. On her return, she quickly spotted an anomaly in the way the company was classifying receivable balances on construction contracts,327 calling it “sloppy accounting”.328 The board agreed that her concerns should be investigated, but shied away from a full independent review. Instead, the board invited the company’s auditor, KPMG, to review work that it had previously audited and approved. KPMG agreed with the board’s conclusion that although Carillion had misclassified assets, it had not misstated revenue. That review did, however, act as the trigger for the wider contract review that led to the £845 million provision in July 2017.329

100.Emma Mercer is the only Carillion director to emerge from the collapse with any credit. She demonstrated a willingness to speak the truth and challenge the status quo, fundamental qualities in a director that were not evident in any of her colleagues. Her individual actions should be taken into account by official investigations of the collapse of the company. We hope that her association with Carillion does not unfairly colour her future career.

Zafar Khan

101.Emma Mercer was in post because the board lost faith in Zafar Khan after only nine months as Finance Director. Mr Khan told us that he “spooked” the Carillion board in September 2017 with a presentation he felt gave nothing more than an honest assessment of the company’s position.330 Philip Green told us, however, that the board concluded collectively that he was “not close enough to the underlying business unit numbers” and not the “right person” to participate in negotiations with the company’s banks.331 Our evidence certainly supports the board’s view. In oral evidence, he claimed success in his top priority of reducing the company’s debt, before eventually admitting “debt increased through 2017”.332 Board minutes from May 2017 show that, when Emma Mercer raised concerns about accounting irregularities, Mr Khan suggested that they showed “incompetence and laziness in the accounting review of the contract”.333 As the then Finance Director, this charge lay ultimately at his door. Although he may not have been the architect of those policies, his previous role as group financial controller hardly meant this was a man lacking in experience of how the company operated.

102.Zafar Khan failed to get a grip on Carillion’s aggressive accounting policies or make any progress in reducing the company’s debt. He took on the role of Finance Director when the company was already in deep trouble, but he should not be absolved of responsibility. He signed off the 2016 accounts that presented an extraordinarily optimistic view of the company’s health, and were soon exposed as such.

Richard Adam

103.The dominant personality in Carillion’s finance department was Richard Adam. He was in charge for most of the last decade, and received a final pay package of £1.1 million in December 2016.334 Andrew Dougal said Mr Adam “exercised tight control over the entire finance function, had extensive influence through the Group” and “was defensive in relation to some challenges in board meetings”.335 His approach to negotiating with the pension Trustee similarly suggested someone who exerted control and refused to compromise. It is impossible to imagine that any significant accounting policy decisions were made without his prior approval.

104.Mr Adam got out at the right time. He told us that he could do no more than speculate as to what went wrong with the company, as in his view he had left it in December 2016 in a healthy state.336 Despite that assessment, he was quick to offload all the shares he had acquired over his years in the business. He sold his entire holding on the day the rosy 2016 accounts were published, and then his 2014 long term performance award shares on the day they vested in May 2017. He told us he does not hold shares because of the risks involved.337 In total, he sold shares worth a total of £776,000 between March and May 2017, at an average price of 212p.338 The share price fell to 57p by mid-July.

105.Richard Adam, as Finance Director between 2007 and 2016, was the architect of Carillion’s aggressive accounting policies. He, more than anyone else, would have been aware of the unsustainability of the company’s approach. His voluntary departure at the end of 2016 was, for him, perfectly timed. He then sold all his Carillion shares for £776,000 just before the wheels began very publicly coming off and their value plummeted. These were the actions of a man who knew exactly where the company was heading once it was no longer propped up by his accounting tricks.

Conclusions on Carillion’s board

106.In their evidence to us, Carillion’s directors gave no indication that they accepted any blame for their decisions that ultimately led to the collapse of the company. They sought to point the finger at anyone or anything else they could find. Rather than a failure of management, the collapse of Carillion was, to them, the fault of their advisers, the Bank of England, the foreign exchange markets, Brexit, the snap 2017 General Election, Carillion’s investors, Carillion’s suppliers, the entire UK construction industry, Middle Eastern business culture, the construction market of Canada, and professional designers of concrete beams.339

107.Carillion’s directors, both executive and non-executive, were optimistic until the very end of the company. They had built a culture of ever-growing reward behind the façade of an ever-growing company, focused on their personal profit and success. Even after the company became insolvent, directors seemed surprised the business had not survived.

108.Once the business had completely collapsed, Carillion’s directors sought to blame everyone but themselves for the destruction they caused. Their expressions of regret offer no comfort for employees, former employees and suppliers who have suffered because of their failure of leadership.

52 The Construction Index, Top 100 construction companies 2014, accessed 1 May 2018

53 Carillion retained its position as the second largest UK construction firm between 2009 and 2017, behind Balfour Beatty in each year.

55 Eaga was renamed Carillion Energy Services.

57 Carillion Energy Services Ltd, Annual report and financial statements, 2011–2016

58 Carillion plc, Annual Report and Accounts 2011, p 92

59 Carillion plc, Annual Report and Accounts 2006, p 74; Carillion plc, Annual Report and Accounts 2008, p 101

60 Carillion plc, Annual Report and Accounts 2006, p 74; Carillion plc, Annual Report and Accounts 2008, p 101; Carillion plc, Annual Report and Accounts 2011, p 92

61 Mowlem cost £350 million - Carillion plc, Annual Report and Accounts 2006, p 74 and Alfred McAlpine £565 million, Carillion plc, Annual Report and Accounts 2008, p 101

62 Standard Life Investments merged with Aberdeen Asset Management in August 2017 to form Standard Life Aberdeen

65 Q233 [Keith Cochrane]

66 Philip Green is not to be confused with Sir Philip Green of Arcadia and, previously, BHS.

68 Q606 [Richard Howson]

70 Q482 [Richard Howson]; Letter from Msheireb Properties to the Chairs, 27 February 2018

71 Carillion plc, Minutes of a meeting of the Board of Directors, 7 June 2017 (not published)

73 Q428 [Richard Howson]

74 Q526 [Richard Howson]

75 Carillion plc, November Board meeting Board Strategy Session, November 2009

76 Carillion plc, Annual Report and Accounts 2010, p 10

77 Q526 [Richard Howson]

79 Carillion plc, Meeting of the Board of Directors, 7 June 2017 (not published)

80 As above.

81 Carillion plc, Annual Report and Accounts 2016, p 43

82 Carillion plc, Annual Report and Accounts 2016, p 7

83 In the Annual Report and Accounts 2016, p 71, Philip Green, Richard Howson, Zafar Khan, Richard Adam, Andrew Dougal and Alison Horner are listed as shareholders. Keith Cochrane and Ceri Powell are not.

84 Carillion plc, Annual Report and Accounts 2016, p 43

85 Q603 [Richard Adam]

86 Q602 [Richard Adam]

87 Carillion plc, H1 2017 Trading Update, 10 July 2017

88 This payment was the final dividend payment for 2016, announced in May and paid on 9 June 2017. Stockopedia, Carillion, accessed 1 May 2018

89 Q383 [Keith Cochrane]

90 Q292 [Zafar Khan]

91 Mr Dougal held 5,000 shares in the company. Carillion plc, Annual Report and Accounts 2016, p 71

92 Carillion plc, Minutes of a meeting of the Board of Directors, 26 January 2017

93 Q383 [Keith Cochrane]

94 Carillion plc, Minutes of a meeting of the Board of Directors, 28 February 2017

95 Q604 [Richard Adam]

96 Analysis of Carillion plc’s Annual Report and Accounts cashflow statements 2011–2016

97 Q388 [Keith Cochrane]

98 Q390 [Keith Cochrane]

99 Q605 [Richard Adam]

100 Analysis of Carillion plc’s annual report and accounts cashflow statements 2007–2016

101 Pensions are deferred pay and pension deficits are responsibilities of the employer. See TPR, Annual funding statement for defined benefit pension scheme, April 2018, p 11.

103 Letter from BlackRock to the Chairs, 8 February 2018, Q1118 [Amra Balic]

104 Q1115 [Euan Stirling]

106 Q1116 [Murdo Murchison]

107 Q1115 [Murdo Murchison]

108 As above.

109 The Carillion ‘B’ scheme was only available to executive directors and other senior employees.

110 Carillion plc, Annual Report and Accounts 2009, p 102

111 Analysis of scheme annual report and accounts.

112 Carillion Group Section; Permarock Products Pension Scheme; Carillion “B” Pension Scheme; The Carillion Staff Pension Scheme; Alfred McAlpine Pension Plan; Mowlem Staff Pension and Life Assurance Scheme; Planned Maintenance Engineering Limited Staff Pension And Assurance Scheme; Bower Group Retirement Benefits Scheme; The Carillion Public Sector Scheme; The Mowlem (1993) Pension Scheme; Prudential Platinum Carillion Integrated Services Limited Section; Carillion Rail (Centrac) Section; Carillion Rail (GTRM) Section. Carillion also had DB pension obligations in Canada following acquisitions there.

113 Letter from PPF to the Chair, 20 February 2018

116 Mowlem Staff Pension and Life Assurance Scheme, Report and financial accounts 2007, p 8

117 Alfred McAlpine Pension Plan, Actuarial Valuation as at 31 December 2008, p 2

118 Mercer, Carillion (DB) pension trustee limited scheme funding report actuarial valuations as at 31 December 2013, p 3

120 Trustee data shows that at the end of 2013, total membership across these schemes was 20,587. Carillion plc Annual Report and Accounts 2013 show that total membership across all schemes was 28,785 at the end of 2013.

121 Pensions Act 2004, section 222

122 Pensions Act 2004, section 224

123 Pensions Act 2004, section 226

124 The Pensions Regulator, Code of practice no.3 Funding defined benefits, July 2014, p44

125 Analysis of scheme valuation reports. The Bower pension scheme operated on a different valuation cycle and is therefore not included here.

126 Q362 [Keith Cochrane]

129 As above.

130 As above.

131 The recovery plans across the five different schemes were all 16 years in length, with the exception of Alfred McAlpine, which was 14 years in length. The Alfred McAlpine Pension Plan Annual report for the year ended 31 December 2010, p 28

133 As above.

135 As above.

143 Gazelle, Carillion plc Paper for the trustee board, 7 February 2012, p 3

144 Mercer, Carillion (DB) pension trustee limited scheme funding report actuarial valuations as at 31 December 2013, p 1. Consequently, there was no great scope for disagreement over this valuation and it was agreed in December 2014.

146 High Court of Justice, In the matter of Carillion plc and in the matter of the Insolvency Act 1986, Exhibit: KC1 - First witness statement of Keith Robertson Cochrane, Dated: 15 January 2018 (Not published); Q757 [Mike Birch]

147 Carillion plc, 2016 Annual Report and Accounts, p 66

148 For example, Q381, Q384 [Keith Cochrane], Q571 [Philip Green]

149 The Pensions Regulator, Annual funding statement for defined benefit pension scheme, April 2018, p 11

150 The Construction Index, Top 100 construction companies 2017, accessed 22 April 2018

151 BuildUK, Mitigating Impact of Carillion’s Liquidation, accessed 22 April 2018

154 Letter from Vaughan Engineering Ltd to the Chair, 30 March 2018; we also received confidential information from other Carillion suppliers on payment delays.

156 The Government and Chartered Institute of Credit Management do not set criteria for exceptional circumstance, but suggest the example of instances where a company is able to demonstrate that they apply different terms to the benefit of their smaller suppliers.

157 Department for Business, Energy and Industrial Strategy and Chartered Institute of Credit Management, Prompt Payment Code, accessed 24 April 2018

159 As above.

160 Q1236 [Greg Clark]

161 Q546 [Richard Howson]; Q547 [Richard Adam]; Q548 [Philip Green]

162 Qq356–8 [Emma Mercer]

163 Qq352–3 [Emma Mercer]

164Prime Minister announces Supply Chain Finance Scheme‘ Prime Minister’s Office, 23 October 2012

165 Carillion was still expected to pay within 30 days on its public sector contracts.

166 Qq354–5 [Emma Mercer]

167 BBC News, Former Carillion sub-contractor in administration, accessed 27 April 2018

169 As above.

170 As above.

171 Carillion plc, Group short term cash flow forecast, 22 December 2017 (not published)

173 Carillion plc, Weekly reporting pack for week ending 26 November Actuals, 8 December 2017 (not published)

174 Q1380 [David Kelly]

175Most UK suppliers uninsured against Carillion’s collapse”, Daily Telegraph, 25 January 2018

176 Institute of Chartered Accountants of England and Wales, What Is Corporate Governance?, accessed 1 May 2018

177 Financial Reporting Council, UK Corporate Governance Code, para 1

178 As above, para 4

179 Q418 [Philip Green]

180 Carillion plc, Lessons Learned Board Pack, June 2017, p 66

181 Carillion plc, EY presentation to Board, 22 August 2017

182 Carillion plc, Minutes of a meeting of the Board of Directors, 22 August 2017

183 Carillion plc , Group Business Plan, January 2018, p 6

186 Q17 [Sarah Albon]

187 PwC, Carillion Group website, accessed 23 April 2018

188 Q110 [Sarah Albon]

189 Q17 [Stephen Haddrill]

190 Carillion plc, 2016 Annual Report and Accounts, pp 50–51

191 Companies House, Carillion plc Officers, accessed 1 May 2018

192 Carillion plc, Remuneration Committee Minutes, 7 September 2017

193 Carillion plc, Annual Report and Accounts 2016, pp 50–51; Carillion plc, Annual Report and Accounts 2016, p 50

194 Q609 [Richard Howson]

195 Q425 [Richard Howson]

196 Q413 [Richard Howson]

197 Q475 [Richard Howson]

198 Q534 [Richard Howson]

199 Q426 [Richard Howson]

201 Q413 [Richard Howson]

202 Carillion plc, Annual Report and Accounts 2016, p 54

203 Carillion plc, Annual Report and Accounts 2016, p 50. He held executive roles at The Weir Group, Stagecoach plc and Scottish Power plc, and continued to be lead non-executive director for the Scotland Office and Office of the Advocate General.

204 Qq229 – 237 [Keith Cochrane]; Carillion plc, Minutes of a meeting of the Board of Directors, 26 January 2017

205 Q244 [Keith Cochrane]

206 Q242 [Keith Cochrane]

207 Q242 [Keith Cochrane]

209 As above.

210Carillion brings start date forward for new CEO”, Financial Times, 20 December 2017

211 The five NEDs in place at the end of 2016 were: Philip Green, Andrew Dougal, Alison Horner, Ceri Powell and Keith Cochrane. As Chairman, Philip Green was paid £215,000 per year. All the others were paid £61,000. Carillion plc, Annual Report and Accounts 2016, p 66

212 Financial Reporting Council, UK Corporate Governance Code, para A.4

213 Q417 [Alison Horner]

214 Q423 [Philip Green]

215 Q420 [Philip Green]

216 The collapse of Carillion, Briefing Paper 8206, House of Commons Library, March 2018

217 Q423 [Philip Green]

218 Q537 [Philip Green]

219 Q1036 [Murdo Murchison]

220 At the time of his appointment as Carillion’s Chairman he was also Chairman of BakerCorp and Chairman Designate of Williams and Glyn Bank Limited and had previously been Chairman of Clarkson plc.

222 City A.M., Carillion chairman Philip Green was a number 10 adviser , City A.M., 15 January 2018

223 Financial Reporting Council, UK Corporate Governance Code, para A.3

224 2014–2016. Executive directors were Richard Howson and Richard Adam. Total remuneration includes salary/fees, benefits, bonus, long-term incentives and pension.

227 Q470 [Philip Green]

228 As above.

230 High Court of Justice, In the matter of Carillion plc and in the matter of the Insolvency Act 1986, Exhibit KC1: First Witness Statement of Keith Robertson Cochrane, dated: 15 January 2018 (Not published)

232 Alison Horner, NED and Chair of the Remuneration Committee, was the only other proposed board member whose appointment pre-dated the July 2017 profit warning.

233 Q618 [Alison Horner]

234 Carillion plc, Review of Current Incentive Plans, 7 October 2015

235 Q618 [Alison Horner]

236 Qq 613–4 [Richard Howson] Qq 613–4 [Alison Howson]

237 Qq 637–8 [Alison Horner]

238 Carillion plc, Annual Report and Accounts 2016, p 73

239 Q620 [Alison Horner]

240 Carillion plc, Annual Report and Accounts 2016, p 73

241 As above.

242 Qq1092–3 [Murdo Murchison]

244 Qq1074–5 [Amra Balic]; Letter from BlackRock to the Chairs, 8 February 2018

247 Q1076 [Amra Balic]

248 Carillion plc, Remuneration Committee minutes, 9 July 2017. Names and job titles of Carillion employees below board level have been redacted.

249 Carillion plc, Remuneration Committee minutes, 23 October 2017

250 Business, Energy and Industrial Strategy Committee, Corporate Governance: delivering on fair pay inquiry.

251 Financial Reporting Council, UK Corporate Governance Code, para D1.1. The terms also specify ‘malus’ provisions, which prevent non-cash aspects earned but not yet paid out from vesting.

252Bank of England tightens bonus rules”, Financial Times, 13 January 2016

253 Carillion plc, Annual Report and Accounts 2016, p 78; Carillion plc, Remuneration Committee: Clawback, 26 February 2018; Q640 [Alison Horner]. The first provision did not apply if the restatement is due to a change in accounting standards, policies or practices adopted by the Company

254Carillion questions over exec bonuses”, Financial Times, 16 January 2018

255 Qq640–1 [Alison Horner]

256 Q640 [Alison Horner]

257 Wood Group, Annual Report and Accounts 2015, p 50; United Utilities, Annual Report and Accounts 2015, p 89; Shell, Annual Report and Accounts 2015, p 90

259 Deloitte, Paper for the Remuneration Committee, 7 September 2017, p 1

260 Carillion plc, Remuneration Committee Minutes, 7 September 2017

261 As above.

262 Q1102 [Amra Balic]

263 Carillion plc, Annual Report and Accounts 2014, p 37

264 Tesco plc, Executive committee, accessed 1 May 2018

265 Q618 [Alison Horner]; Q622 [Alison Horner]; Q625 [Alison Horner]

266 Q618 [Alison Horner]

267 Q641 [Alison Horner]

268 Q413 [Alison Horner]

269 Companies Act 2006, section 393

270 Q1026 [Murdo Murchinson]

271 The collapse of Carillion, Briefing Paper 8206, House of Commons Library, March 2018

272 Investopedia, What is considered a good net debt-to-equity ratio?, accessed 27 April 2018

274 Carillion plc, H1 trading update, 10 July 2017

276 London Stock Exchange, Carillion share price, accessed 1 May 2018

277 This was a question from a joint presentation by Morgan and Stanley and HSBC to the Carillion audit committee, 22 August 2017,

279 Aberdeen Standard Investments is the investment arm of Standard Life Aberdeen plc, which was formed as a merger of Standard Life plc and Aberdeen Asset Management plc in August 2017. It was Standard Life who held shares in Carillion in 2015 and 2016.

280 Q1029 [Euan Stirling]

281 Carillion’s group business plan shows that of the £1,045 million provision, £729 million went against trade receivables, with the rest being added to future costs. Carillion’s Group Business Plan, January 2018, p 41

282 Oral evidence taken before the Liaison Committee on 7 February 2018, HC 770 (2017–19), Q5 [Sir Amyas Morse]

283 Carillion’s notes to their financial statements confirm that this is the method that they were using, Carillion plc Annual Report and Accounts, p 96

284 Further complexity is added to this equation by the potential inclusion of insurance claims, incentive payments and variations arising on the initial contract. Carillion plc’s Annual Report and Accounts 2016, p 96, stated that these are only recognised as revenue “where it is probable that they will be recovered and are capable of being reliably measured”.

285 KPMG, independent auditor’s report, included in Carillion plc’s Annual Report and Accounts 2016, p 86

287 As above.

290 As above.

291 Deloitte quoted a difference of £53.9 million between those figures. Those figures were based on November reviews. The audit committee papers show that the year-end position recorded in the financial statements was based on a profit margin of 4.44%, which would equate to £52.5 million.

292 This figure was part of the initial provision figure of £695m that was presented to the Board on 7th July (August 2017 Audit Committee papers - not published). This was subsequently increased to £845m by July 9th, with a corresponding increase in the provision against Royal Liverpool of £15m (September 2017 Audit Committee papers - not published). Keith Cochrane explained that he personally took the decision to increase the provision over that weekend, Q240 [Keith Cochrane]

293 The Hospital Company (Liverpool) Ltd Annual report and financial statements, December 2014

294 As above.

295 Carillion Major Projects Status Report, October 2015 (not published)

296 Q447 [Richard Howson]

298 Q445 [Richard Howson]

303 February 2017 audit committee papers (not published)

304 Q273 [Zafar Khan]

305 KPMG, Enhanced contracts review and half year update, 9 July 2017 (not published)

306 Carillion Audit Committee papers, September 2017 (not published)

307 Carillion plc, Lessons Learned Board Pack, June 2017, p 66

308 Carillion plc, Lessons Learned 7 June Minutes (not published)

312 Moody’s, Carillion’s collapse exposes flaws in the accounting for supply-chain finance, 13 March 2018; Carillion, Group short term cash flow forecast, 22 December 2017 (not published)

314 As above.

315 There is one reference to the early payment facility in the 2016 Annual Report and Accounts within the strategic report section, but nothing in the financial statements. Carillion plc, Annual Report and Accounts 2016, p 13

318 The ratio was net debt to EBITDA (earnings before interest, taxes, depreciation and amortisation).

320 Carillion plc, Annual Report and Accounts 2016, p 18

321 Cashflow statements break down how cash is generated within a company. The cash flows from operating activities is essentially the cash that been generated through trading, whereas the financing cash flows show the cash generated through borrowing and equity. By presenting money borrowed under the early payment facility as “other creditors”, it’s classification within the cashflow can be seen as part of the company’s operating activity rather than a financing activity.

323 Oral evidence taken before the Liaison Committee on 7 February 2018, HC 770 (2017–19), Q7 [Sir Amyas Morse]

324 Emma Mercer did not join Carillion plc’s board.

325 Q264 [Emma Mercer]

327 Emma Mercer’s concern was that Carillion were using “negative accruals”, which were netting off payables and receivables balances. Whilst KPMG confirmed this was permitted under international accounting standards on construction contracts, Carillion had a “golden rule” not to do so.

328 Carillion plc, minutes of a meeting of the Board of Directors, 15 May 2017, p 4

329 As above.

330 Q314 [Zafar Khan]; Letter from Zafar Khan to the Chairs, 21 February 2018

332 Qq342–44 [Zafar Khan]

333 Carillion plc, Minutes of a meeting of the Board of Directors, 9 May 2017, p 4

334 Carillion plc, Annual Report and Accounts 2016, p 66

337 Q467 [Richard Adam]

339 Q234 [Keith Cochrane]; Qq238–9 [Keith Cochrane]; Q282 [Zafar Khan]; Q298 [Zafar Khan]; Qq305–6 [Zafar Khan]; Q381 [Keith Cochrane]; Q385 [Keith Cochrane]; Q445 [Richard Howson]; Qq448–452 [Philip Green]; Q462 [Philip Green]

Published: 16 May 2018