British MPs have demanded the big four accountancy firms be referred to competition authorities for potential break-up following the collapse of government contractor Carillion, calling them a "cosy club incapable of providing the degree of independent challenge needed".
The recommendation by members of two powerful parliamentary committees was contained in a damning 100-page report on Carillion’s failure, which also accused the government, regulators and Carillion board members of failing in their responsibilities, often because they acted “entirely in line with their own personal incentives”.
Carillion, which went into liquidation in January with liabilities of £7 billion and just £29 million in cash, was “a giant and unsustainable time bomb”, the report found. Its failure, one of the biggest in the UK in recent times, exposed “systemic flaws” in corporate Britain and its “toothless” and “feeble” regulators.
Although Deloitte was Carillion's sole internal auditor, all three of the other big four did work for the group, with KPMG serving as external auditor, EY providing turnround advice and PwC advising the company, its pension schemes and the government.
KPMG is already under investigation by the UK’s accountancy regulator for its role.
MPs concluded that Carillion “ presented accounts that misrepresented the reality of the business and increased its dividends come what may.”
“Aggressive” accounting policies included booking revenues for work that had not been agreed, delaying payments to suppliers so that they could be used in effect as a “credit card”, and “routine quibbling” over invoices.
“Whether or not all this was within the letter of accountancy law, it was intended to deceive lenders and investors,” the committee said.
"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," said Rachel Reeves, chairwoman of the business select committee.
The report says that the appearance of prominent advisers proved nothing other than the “willingness of the board to throw money at a problem and the willingness of advisers to accept generous fees,” MPs added.
The report called on the government to refer KPMG, EY, PwC and Deloitte to the Competition and Markets Authority (CMA) for potential break-up, or splitting the firms' audit functions from non-audit services.
The recommendation comes amid other calls from industry watchdogs and policymakers to consider breaking up the quartet. The head of the Financial Reporting Council, the UK accountancy regulator, and influential MPs such as Frank Field have argued for the need for greater competition following a series of accounting scandals.
Andrew Tyrie, a former Conservative MP who has been named the new head of the CMA, has said he will look at competition in the audit market dominated by the accountancy firms.
The collapse of Britain’s second-largest construction company sent shockwaves through the British economy, threatening the jobs of 19,500 employees in the UK and raising questions about projects Carillion was working on, which included the HS2 high-speed rail line as well as a number of schools projects in Ireland. It also raised severe doubts over the UK government’s reliance on outsourcing firms for everything from healthcare to prisons to education.
Although the report was highly critical of accountancy firms, it was nearly as scathing of the Financial Reporting Council and the Pensions Regulator, which were too "passive and reactive" and require "cultural change" as well as more powers.
The government's Insolvency Service, which is handling the company's winding-up, should also "carefully consider" whether Carillon's former directors, including Richard Howson, the chief executive, Philip Green, chairman, and Richard Adams, finance director, breached their duties under the Companies Act and should be recommended to the secretary of state for disqualification.
Ms Reeves said “delusional directors” had “driven Carillon off a cliff and then tried to blame everyone but themselves”.
The report found: “Carillion was not just the failure of a company, it was a failure of a system of accountability which too often leaves those responsible at the top - and the ever present firms that surround them - as winners while everyone else loses out.”
Since Carillon’s collapse, the UK government has already committed £150 million to keeping essential services running, such as the cleaning of hospitals and prisons and the provision of school meals.
According to the Insolvency Service, 2,301 workers have been made redundant, and a further 11,618 staff transferred to other employers. About 3,000 of the group’s 19,500 UK employees have been retained but face an uncertain future.
Carillon’s rise and “spectacular fall” was a story of “recklessness, hubris and greed,” the committee said. A “rosy picture” of the company’s accounts was presented to investors in March 2017, justifying a record dividend of £79 million, £55 million of which was paid on 10 June 2017.
By July, the company had announced an £845 million reduction in the value of its contracts – the first in a series of warnings that ultimately led to the company’s collapse.
Between 2012 and 2016, it ran up debts and sold assets worth £217 million to continue paying dividends to shareholders. While the group paid out dividends of £376 million over the five-year period, it generated just £159 million of net cash from operations.
The report will come as a wake-up call for other government contractors including Interserve, Mitie, Serco and Capita, which have given profit warnings following sustained periods of growth driven by debt-funded acquisitions.
All five companies are attempting to rebuild themselves after ousting their chief executives and being taken over by new management. “Carillion could happen again, and soon,” the report warned. – Copyright The Financial Times Limited 2018
