Carillion “aggressively managed” accounts to stave off collapse

Carillion “aggressively managed” its accounts and caused untold problems for its sub-contracted supply base even before its collapse by quadrupling its payment period.

The situation emerged following the publication by the joint parliamentary committee investigating the group’s collapse of an until-now, secret document commissioned by the Carillion board towards the end of last year which it intended to present to potential lenders but was never used.

The 96-page report, produced by FTI Consulting and dubbed Project Ray, states that the group was facing a financial crisis, stemming from major losses and an overstatement of profits on a number of construction and support services contracts in the UK, Canada and the Middle East.

It goes on: “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

“The historical year-end and half-year public reporting of the group’s net debt has been aggressively managed through the short-term deferral of payments, acceleration of receipts and receipt of short term loans from JVs.”

Having incurred borrowings in the region of £1.5bn from a number of banks and debt investors in order to fund its losses – including £140m of emergency financing in September 2017 – the group said it needed full equitisation of its institutional debt and additional financing of around £360m to underpin forecast cash outflows on loss making contracts and working capital requirements over what would be, the next two years.

In addition to the £1.5bn of financial debt, the group amassed a further core debt of between £250-£300m through its off-balance sheet supplier financing arrangements, which extended payment terms to suppliers from 30 to 120 days. It also received significant advance payments on construction and ICT supplier contracts.

In addition to this, the group was said to be further over-burdened with a number of defined benefit pension scheme liabilities of around £700m.

Somewhat ironically, the report is dated January 15, 2018 – the day the group was liquidated – and was never presented.

It has now been published by the joint work and pensions and business, energy and industrial strategy committee.

The committee has also published a further response from the Federation of Small Businesses, which reiterates the body’s concerns over Carillion’s poor payment record.

The FSB states: “When the Government finally presents its corporate governance regulations we want to see clear ownership of a company’s payment practices by its whole board. The blank looks and apparent lack of awareness on display to your committees will have been hard for Carillion’s small businesses to swallow.”

In a joint response, Frank Field, chair of the W&P Committee, and Rachel Reeves, chair of the BEIS 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.”

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