Case Study IV - Carillion Construction Bankruptcy

Who were Carillion?

Carillion were a UK based Construction company head-quartered in Wolverhampton

UK. It was the second largest construction company in the UK and had a hit of major
government projects including HS2 (High Speed 2 – a Railway project).

Carillion Plc was also a British multinational facilities management and construction
services company. It is listed on the London Stock Exchange, and (in January 2018)
had some 43,000 employees (around 20,000 of them in the United Kingdom). The
company experienced financial difficulties in 2017 and went into compulsory
liquidation on 15th January 2018, the most drastic procedure in British insolvency law.

Describing itself as an "integrated support services business", it held about 450

governmental contracts, spanning the UK education, justice, defence and transport
ministries.
It managed the Smart Motorways traffic control system and supplied school dinners
as well as maintaining about half of the UK's prisons and Young Offender Institutions.
Its responsibilities included cleaning, landscaping and catering.
Carillion was the second-biggest supplier of maintenance services to Network Rail.

It also operated in Canada, the Middle East and the Caribbean and was a big supplier
of construction services to the Canadian government.

Carillion’s financials

On 10th July 2017, Carillion announced that its profits would be hit by £845 million.
Consequently, its chief executive resigned and there would be no dividends that year.
The shares lost 70% of their value over the announcement and the two days that
followed. Although the July 2017 profit warning marked the beginning of the end for
Carillion, poor decisions in the years lеаding up to it were what caused the company
serious trouble. Of the £845m charge, Carillion said that £375m related to the UK
(mostly three public sector projects) and £470m to overseas markets (mostly exiting
markets in the Middle East and Canada).

Over the eight years from December 2009 to January 2018, the total owed by Carillion
in loans increased from £242 million to an estimated £1.3 billion – more than five times
the value at the beginning of the decade.

Its biggest problems were cost overruns on three UK public sector construction
projects:
 The £350m Midland Metropolitan Hospital in Sandwell: opening delayed to
2019 due to construction problems
 The £335m Royal Liverpool Hospital: completion date repeatedly pushed back
amid reports of cracks in the building
 The £745m Aberdeen bypass: delayed because of slow progress in completing
initial earthworks.

In December 2017, the firm convinced lenders to give it more time to repay them.

But the company's banks, which include Santander UK, HSBC and Barclays, were
reluctant to lend it any more cash.

The UK government has said staff and contractors working on public sector contracts
will continue to be paid.
Summary

This is a big company and the demise into compulsory liquidation means that they did
not have enough money/cash to keep the company going whilst an administrator
sorted it out – in other words it could not be salvaged as is. This means staff and the
many thousands of small companies supplying Carillion were faced with a complete
break, an extremely difficult situation. In the case of the Royal Liverpool Hospital they
had to continue operating (literally) for nearly nine months in the old building due for
demolition, with flooding, power outages and so on before the UK Government agreed
to fund the completion of the new Hospital.
Questions for discussion

1. Who do you think is responsible for this situation arising over time – the
directors or the Companies Auditing Firm, and why?

It seems apparent, that both the directors of Carillion and KPMG had a hand in the
slow demise of Carillion. Cash flow and rising debts sent shares down and
eventually pushed the CEO to step down. However, KPMG, seemed to have a larger
stake in this collapse. Which was brought to light by their later investigation. KPMG
was investigated by UK’s Financial Reporting Council over its role in the collapse of
Carillion. Greg Clark, FRC’s business secretary welcomed the investigation, which
the accounting watchdog said followed inquiries made since Carillion’s shock profit
warning in July. If was the FRC’s goal to conduct the investigation, as quickly and
thoroughly as possible. The probe will examine whether the organisation’s auditor
failed to adhere ethical and technical industry criteria.

The FRC investigation considered whether KPMG breached the ethical and technical
standards for auditors, alongside any other negligence which might have played a
role in the collapse of Carillion. Several areas of KPMG’s work were scrutinised,
including estimates and recognition of revenue on significant contracts and
accounting for pensions. The unfolding of this company effected the lives of
thousands of individuals and it seems to me both took part in this demise.

2. In July 2017 financial difficulties were acknowledged. What should have been
done at this stage by a) the Directors; b) the Auditing Company.
It seemed that even after this acknowledgement, the borrowing and the debt
continued to mount. On July 10th of 2017, it was announced that their profit was
taking a major hit. There shares lost 70 percent. Both the CEO and CFO, the
directors and the KPMG should have taken notice and started up a plan on how to
fix the situation. Instead, the CEO just resigned. Leaving behind a mess that only
got worse. Also, Carillion had gotten behind on payments to their lenders and again
and again asking for time to repay their debts. It was apparent to me, that they just
had too many irons in the fire. There needed to be a major cutback on business,
cut loss all contracts that were not profitable.

3. Should the UK Government have got involved and if so why?

The UK government did get involved. With the demise of the company, if left many
holding their hats in their hands. Its employee’s and staff, many of thousands of
small companies supplying Carillion were faced with the same fate as Carillion,
due to their lack of payment to them. Then, not counting all the unfinished jobs and
contracts. They supplied meals to schools, maintained cleaning, landscaping and
catering to the UK’s prisons, all of this being just dropped on to the hands of the
UK government. So of course, the UK government would get involved and did so
by investigating KPMG and what exactly went wrong with their auditing firm.

Also, the pensions. Going back to the investigation of KPMG, several areas of
KPMG’s work was examined including estimates and recognition of revenue on
significant contracts and accounting for pensions. Under the investigation, it was
found that instead of tackling its growing pension deficit, he said, the company paid
out hundreds of millions of pounds in dividends to shareholders and “handsome”
pay packets to bosses.

4. What are the key lessons to learn from the three major projects which caused
Carillion to get into difficulties? In all three projects, there were delays. As I said
before, Carillion had too many irons in the fire. They had too much to take care
of and upper management, the directors just wasn’t managing and doing their
jobs. Instead they were shoving money into their pockets. However, all three
projects had slowdowns for whatever reason, and this caused cost overruns for
Carillion, in effect causing much of its rising debt and lost profits. The main take
away is to not take on more than you can manage.

5. The ultimate stakeholders in these three projects were the UK Government.

What does this case say about the Governments handling of the vendor
(Carillion) and what would you have done differently if you were leading the
Governments projects?
The UK government put too much trust into Carillion. The shadow pensions
minister, Jack Dromey, said the system of oversight at Carillion had clearly
failed. He added that 28,000 workers were now paying the price with their
jobs and pensions. News of the FRC investigation came as Frank Field, the
chair of the Commons work and pensions committee, accused Carillion of
trying to “wriggle out of its obligations to its pensioners for the last 10 years”.

The government gave Carillion and its operators too much business. I think
with the UK government putting pressure on Carillion was a smart move.
Having the FRC do an investigation on KPMG was a good first move. It
needed to be done. Also, however, I think the UK government should have
investigated the directors. The CEO who stepped down. That is what I would
have done differently. It was extremely apparent these upper managers had
their fingers in the profits and left Carillion with money that belonged to the
staff and employee’s, folks pay checks and pensions. To me the biggest
travesty was how bad the people, the employees of Carillion, the backbone of
the company just got shafted. These are everyday people with families that
needed this company to prosper.