Carillion used aggressive accounting to mask problems

Aaron Morby 6 years ago
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Carillion hid its mounting problems with aggressive accounting and cash flow management, a previously unpublished report commissioned by the firm’s banks in 2017 warned.

The confidential report from FTI Consulting states: “The group has been poorly managed for a considerable period, during which time significant underperformance and contract issues have been masked by aggressive accounting and working capital management.”

It also concluded that Carillion would need an extra £500m to cover its peak cash needs rather than the board’s assessment of £360m to deliver its survival plan.

The joint select committee investigating Carillion published the document containing the damning verdict this weekend. It also revealed that on the Friday before before its liquidation on the following Monday £3.1m was paid out to consultants and advisers.

The bombshell report shows that instead of supporting the company, outside finance experts ­uncovered “gross failings of corporate governance and accounting”.

“It is apparent that, for a number of years, the group has been compensating for the failure to convert reported profits into cash through the incurrence of further debt (both on and off balance sheet) and the aggressive management of working capital,” it states.

“The historical year-end and half-year public reporting of the group’s net debt has been aggressively managed through the short term deferral of payments, acceleration of receipts and receipt of short term loans from JVs.”

The report, which never went to the Carillion board for its response, recognises many of its conclusions would be challenged by management particularly its assessment of Carillion’s ability to secure future contracts.

FTI also reported: “The Group’s profit warning and the quantum of the provisions taken cast significant doubt on the true historic trading position and cash generation of the business.

“Rather than addressing the underlying challenges facing the Group in respect of problem contracts and the strength of the balance sheet, transactions were entered into, and accounting treatments and assumptions made, to enhance the reported profitability and net debt position of the group.”

“Whilst circumstances outside of the group’s control are a factor in the operational challenges faced on certain projects, a lack of management attention to (and accountability for) addressing key issues, governance failures over the amount of risk being taken on, and a focus on short term financial benefits (net debt and cash) at the expense of long term profitability and viability are significant contributing factors,” it states.

FTI estimated that in addition to the £1.5bn of financial debt, Carillion amassed a further £250m – £300m of ‘core debt’ through it’s off balance sheet supplier financing arrangements, which extend payment terms on the supplier base from 30 days to 120 days

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