Carillion left £2bn owed to supply chain

16 May 2018

Carillion owed around £2bn to 30,000 suppliers, subcontractors and other short-term creditors when it collapsed early this year, a parliamentary report has said.

The Work and Pensions Committee and the Business, Energy and Industrial Strategy (BIES) Committee, which have just published their final report as part of a joint enquiry into the sudden collapse of the contractor, said they expected creditors to get “little back” from the liquidation.

The publication of the report follows a broadside by the committees on Carillion’s payment practices, in which they accused the firm of being a “notorious late payer” and of using suppliers as a “line of credit”.

Both accusations are repeated in today’s report.

Gerry Walsh, interim group CEO of CIPS, said the collapse of Carillion was a symptom of a broader problem in the way that UK companies sold services.

“Procurers have a responsibility to ask themselves if a seller’s offer is too good to be true and that responsibility doesn’t end once the contract is signed,” he said.

He added it was time to have an “open conversation” about how business sell, procure and monitor contracts. “All too often the negotiation is a race to the bottom on costs, without proper consideration for how the work will be delivered or if indeed the scope will evolve and change.

“Fair and transparent contracts which allow for flexibility should underpin long-term, accountable relationships.”

The Specialist Engineering Contractors’ (SEC) Group, which represents businesses in the specialist engineering sector, said the collapse of Carillion had “shone a light on the dark underbelly” of the construction sector.

Rudi Klein, CEO of SEC Group, said: “Unfortunately Carillion is not alone. Payment and contractual abuse is rife in the construction industry.”

He called for the use of central project bank accounts on public sector projects, regulations mandating 30-day payment on public contracts, protection schemes for retention payments and for the small business commissioner to be given the power to fine companies.

Today’s report also attacked the accountancy industry, including the dominance of the “big four” firms – KPMG, PwC, Deloitte and EY – all of which had worked for Carillion at some point.

The report said KPMG, which was the Carillion’s auditor for all of its 19 years in business, failed to exercise “professional scepticism” towards the firm's accounts. “Such a long tenure inevitably calls into question whether they could provide the independence and objectivity that is crucial to high-quality audit,” it said.

It said KPMG’s audit failures were “not isolated failures, but symptomatic of a market which works for the big four firms”.

Rachel Reeves, chair of the BEIS committee, described the relationship between companies and the big four accountancy firms as “parasitical” and called for the competition watchdog to look into ways of increase competition.

The report suggested this could be done by by making businesses run competitive tender for their auditing services more regularly, by breaking up the auditing arms of the big four companies or making the big four separate their auditing and non-audit functions (for example consultancy).

Reeves said: “[Auditors] are guilty of failing to tackle the crisis at Carillion, failing to insist the company paint a true picture of its crippling financial problems.

“KMPG, PwC, Deloitte and EY pocket millions of pounds for their lucrative audit work even when they fail to warn about corporate disasters like Carillion. It is a parasitical relationship which sees the auditors prosper, regardless of what happens to the companies, employees and investors who rely on their scrutiny.

“The Competition and Markets Authority must now look at the break-up of the big four accountancy firms to help increase competition and deal with conflicts of interest.”

EY said it was “saddened” by the impact of Carillion’s collapse, but said Carillion's stakeholders “[declined] to support” the plan EY had helped develop to improve the company’s position.

PwC said competition in the audit market was “fierce” but said it would “welcome more players to boost choice”.

Deloitte said it was “very disappointed” with the report’s conclusions about its role as an internal auditor for Carillion. In response to the report’s concerns about competition in the market, it said “a scale, multi-disciplinary model” was “absolutely essential” for high quality auditing.

KPMG has not yet responded to a request for comment.

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