Carillion masked debt with 'aggressive' accounting while Govt failed to step in

 

The Government knew of a plan that could have clawed back more than £360m from the collapsing infrastructure giant Carillion and saved former employees from having their pension payouts cut but did not act to secure it.

The Guardian has reported that the Cabinet Office - responsible for oversight of government contractors - did not apply pressure on Carillion’s directors to adopt proposals presented by accounting firm EY in mid-December last year to break the company up.

The news comes as MPs published a review of the firm conducted before its liquidation by potential lenders, which revealed that 'aggressive accounting' tactics were used to mask the heavy debt the firm was collapsing under.

EY suggested selling the profitable parts and placing the rest into liquidation in efforts to generate £364m, of which £218m would have been allocated to the firm’s 13 pension schemes, estimated to have a deficit of close to £1bn.

”Local
Carillion workers on a rail project

Sources told the Guardian this could have prevented some of the schemes entering the Pension Protection Fund (PPF), which will reduce the amount that many of its 27,500 members receive in retirement.

The board of directors rejected the proposal, and after seeing it, the Cabinet Office applied no direct pressure to them to accept the plans and try to minimise the impact on the sector and the taxpayer.

The Cabinet Office confirmed it had seen the options presented by EY to the Guardian.

A spokesman said: 'Throughout this process, the government has been clear that its priority is to ensure that public services continue to run properly, and we regularly meet with our strategic suppliers and monitor their financial health. Since the collapse of Carillion, our plans have ensured that public services can continue to run as normal.'

MPs on the Work and Pensions Committee and Business Committee, which are conducting a joint inquiry into the firm's collapse, said the board 'dismissed a break-up as not practical, instead choosing to believe they could successfully restructure [the business]'.

The committees also published the executive summary of an Independent Business Review (IBR) commissioned in September 2017 for prospective lenders to Carillion, which painted the company in a very negative light.

Frank Field, chair of the Work and Pensions Committee, and Rachel Reeves, chair of the Business, Energy and Industrial Strategy Committee, said: 'There are many losers from the Carillion calamity: employees, pensioners, suppliers and the well-run businesses that pay the PPF levy. Many of those face an anxious wait to see what the consequences of the gross failings of corporate governance and accounting will be for them, their businesses and their families.

'Not so these omnipresent consulting giants, who can always be relied upon to emerge enrichened from any crisis. As everything collapsed around them, they were merrily cashing cheques.'

The IBE report states: '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.

'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.'

The Official Receiver said on Monday (5 March) that a further 150 former Carillion employees will transfer to new suppliers who have picked up contracts that the firm had been delivering but that it had been unable to find ongoing employment for a further 87 employees.

So far 8,216 jobs have been saved and 1,458 jobs have been made redundant through the liquidation.

 

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