Nineteen Clean Audits

On 10 June 2017, Carillion paid out £55 million to its shareholders, the larger part of a record £79 million dividend approved on the back of the 2016 accounts published that March, which had presented what investigators later called a rosy picture. On 10 July, one month later, the same company told the stock market that its contracts were worth £845 million less than it had said. By September the write-down had grown to £1,045 million, a sum equal to the company's previous seven years of profits combined. By January 2018 the company was in liquidation, holding liabilities of nearly £7 billion against £29 million in cash, with one question hanging over the wreckage: how could so many warnings surface, and so few of them ever be pressed to an answer?

Around 43,000 people worked for Carillion, 19,000 of them in the UK. It owed around £2 billion to 30,000 suppliers, subcontractors and other short-term creditors. Its pension schemes were left short by around £2.6 billion, and their 27,000 members would be paid reduced pensions by the Pension Protection Fund.

I work in this industry. I have spent years on and around major UK projects, and I want to be straight about what the official verdict was, because it was not gentle. The two select committees that investigated the collapse called it a story of recklessness, hubris and greed. They said the company's accounts misrepresented the reality of the business, that optimistic revenue figures were produced in defiance of internal controls, and they named the board responsible and culpable. This was not, in their telling, bad luck.

And yet the same report contains the sentence I cannot leave alone. "The individuals who failed in their responsibilities, in running Carillion and in challenging, advising or regulating it, were often acting entirely in line with their personal incentives."

Look at what that meant in practice. Carillion was a signatory of the Prompt Payment Code and, at the same time, enforced standard payment terms of 120 days on its supply chain. If a supplier wanted to be paid sooner, it could be, for a fee, an arrangement the committees said let the company borrow more, under the radar. The committees said Carillion treated its suppliers with contempt; the Prompt Payment Code contradiction and the 120-day terms were among the evidence. Anyone who has watched a subcontractor's cash flow on a big job knows what 120 days does to a small firm. Wages, plant and materials get financed by the smallest player while the largest holds the cash.

KPMG audited Carillion for nineteen years and was paid £29 million for the work. Unqualified is the technical term. It means the published audit opinion was not qualified; it does not mean the accounts were sound. Nineteen years of audits, and not once a qualified opinion. The committees said that in failing to exercise professional scepticism towards Carillion's accounting judgements, KPMG was complicit in them. The company was gone within a year of the last set of published accounts.

The regulators had their openings too. The Financial Reporting Council raised accounting concerns about Carillion in 2015 and did not follow them up. The Pensions Regulator threatened, on seven occasions, to use a power to enforce pension contributions that it had never used. The committees called those threats empty, and noted that the directors knew it.

Put those threads together, and this is why the case matters beyond one company's obituary. The committees' hard words are earned, and their report documents worse than misplaced incentives: figures manipulated in defiance of the company's own controls. My reading, and it is mine rather than theirs, is that incentives shaped what got done, what got signed, and what got asked. Some warning signs were in plain sight, for the board, for the auditor, and for the regulators whose desks they crossed. The payment terms were standard practice, written into the supply chain's contracts. The pension problem was on the Pensions Regulator's desk, where action was threatened seven times and never taken. And the question that might have changed the story was not an exotic one. What are these contracts really worth, if we value them cautiously? It was the question the board and the auditor were there to ask. We like to judge decisions by outcomes, and with Carillion the outcome makes judgment easy. The harder and more useful test is what was knowable at the time, and what a person inside that system was rewarded for pressing.

I wrote my book because I have watched versions of this pattern on ordinary jobs, far from any boardroom: failures fed by people whose incentives pointed away from the question that mattered. Carillion is that pattern in my own industry, which is why it stings. The committees concluded that the mystery was not that Carillion collapsed, but that it lasted so long. I would add one line, and it is mine, not theirs. It lasted because, desk by desk, the rewards pointed at the signature and not at the question.

The dividend went out on 10 June 2017. The July profit warning followed thirty days later. One was a decision, the other an admission, and behind both stood nineteen years of clean opinions. The committees were right to use hard words. I just want us to hear what those words are standing on.