Wednesday, 30 May 2018

Carillion case shows crisis public interest auditing

 Four Auditors!
by Brian Bamford
WHEN Carillion collapsed in January this year, it brought into focus the Government's relations with major suppliers and showed how it impacts on vital public services in local communities such as Tameside MBC, which since at least 2011 had deveoped a partnership with the company.  

How could the decline of Carillion have been overlooked by Government, and the firm's auditors, when readers of the Financial Times, the markets and particulary those shorting its shares since May 2015, were well aware of what was happening?

On the 23 May 2018 the Select  Committee Chair, probing the Carillion case and the role of its auditors  Meg Hillier MP:said:'Government has become dependent on large contracts to deliver public projects and services.  Great secrecy surrounds them.   If a company providing a number of these contracts fails, this is bad news for service users and the taxpayer.........

'When a contract breaks down, Government is the provider of last resort.  While it did not bail out Carillion – the company went in liquidation – it did inherit responsibilities and costs, ultimately borne by taxpayers, that would otherwise not be met.
'Failure of essential services is not an option so we need to understand the potential risks to the taxpayer....'

Of the 'Big Four' auditors available three were already deeply implicated and involved doing Carillion's accounts with KPMG, which had been carrying out an external auditor for Carillion for 19-years, while Deloitte had carried out the internal audit, and EY had provided turnround advice before Carillion was declared insolvent last January.  

Thus, it was left to the auditors PwC, which despite earning £17 million in fees related to Carillion in the last 10-years, as the least compromised by a conflict of interest to handle the liquidation when the Official Reciever came calling for a special manager to do the job.

In the Financial Times John Plender wrote on the 19th, May:
'Overall, this quartet of accountancy behemoths (KPMG; Deoitte; EY and PwC) .collectively received £51.2 million for services to Carillion in the 10 years before the collapse, a further £1.7 million for work on the company's pension schemes and £14.3 million from government for work relating to contracts with Carillion.  small wonder the MPs concluded that this was a "cosy club incapable of providing the degree of independent challenge needed".'

Somehow, perhaps owing to vain expectations, the Government failed to grasp the the seriousness of the situation.  As the Select Committee Deputy Chair, Sir Geoffrey Clifton-Brown MP pointed out lasr week:
'The Government’s RAG scale for Strategic Suppliers appears to be too slow and clunky. Profit warnings for Carillion were issued in July and September 2017 and yet a high-risk recommendation to Ministers was not made until 29 November 2017. The City, in contrast, knew well before July 2017 that Carillion was in trouble.
'Too many Government facilities contracts were concentrated in one large firm giving the impression that it was too big to fail, hence the perception that the Government would bail them out when push came to shove.
'The Carillion Board’s erroneous belief that the Government would not let the company collapse appears to have contributed to their failure to take the necessary action to save the company and prevent the sad loss of jobs and damage to numerous suppliers and subcontractors when Carillion went into liquidation.'
Even if the audit of Carillion by auditors KPLM in December 2016 was wildly over-optimistic and effectively valueless, it did show a company in trouble, and John Plender in the FT wrotes:  'I did not require a degree in accountacy to see that this tecnically insolvent company was paying more in dividends than it was generating in cash, while borrowing heavily, under-investing and sitting on a growing pension fund deficit.'

Investors who were selling Carillion shares short began to spot what was happening as early as  mid-2015.  The problem is that there is a reluctance to prosecute the auditors in these cases, as was demonstrated with the US attorney-general's decision in 2005 not to pursue a criminal prosecution of the auditors KPML over the sale of fraudulent tax products for fear of putting KPMG out of business.  The problem is that we are all now seemingly at the mercy of the global 'Big Four' auditing companies and the public interest audit function is suffering from a de facto 'too few to fail' regime.

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