Construction drawings and tools on site office desk. 3d illustration
Image © rawf8 via Envato Elements

The relationship Carillion had with the auditors KPMG was too cosy, it was like the fox guarding the hen house

The collapse of Carillion in January 2018 was one of the biggest in recent history. The company specialised in providing outsourced services, managing huge public sector projects including the construction of schools, hospitals and roads, around 450 of which were left in limbo when the company went under. Carillion also managed public services, winning contracts in transport, defence and the prison system. So not only did the 3,000 people the company employed directly all lose their jobs, the livelihoods of the 75,000 people who worked in its supply chain were also threatened. 

Most people trace Carillion’s collapse back to when several major construction projects went over budget, starting in around 2016. The company was also hit by delayed payments on overseas projects, which led to Carillion going further into debt throughout 2017. It issued a profits warning in July of that year, causing its share price to plummet. However, just a week later it was awarded a £1.4 billion contract for HS2 and just eight weeks before its collapse was awarded another public sector transport contract worth £130m.  Carillion’s bosses also walked away with millions in bonuses, much to the anger of the public. 

Carillion’s auditors included KPMG (external audit) and Deloitte (internal audit). The company was also involved with EY (who were paid £10m for “turnaround advice”) and PwC, the only auditor without a conflict of interest, who managed the insolvency process and earned £20m for their first eight weeks of work. 

KPMG in particular were heavily criticised by MPs for their role in allowing the company to get so heavily in debt. They were accused of being complicit in the company’s accounting practices that were masking serious financial problems and “complacently signing off its directors’ increasingly fantastical figures”. Deloitte as internal auditors were also accused of failing to notice or ignoring “terminal failings” at Carillion. 

In September 2021 the Financial Reporting Council announced a formal complaint against KPMG in relation to their work at Carillion. The complaint alleges that KPMG and specific people within it provided false and misleading information and documents as part of their audit of Carillion’s accounts in 2016. The hearing into this complaint began in January 2022. Additionally, in February 2022, Carillion's Official Receiver (i.e. the officials overseeing the liquidation process) lodged a claim worth up to £1.3 billion against KPMG, arguing that incompetence by the auditor resulted in Carillion ending up in a worse financial position than it otherwise would have. 

Image © Terry Robinson via Geograph

Someone who knows this story first hand is Andy Bradley, who is the boss of a company that was a subcontractor of Carillion when it collapsed. Andy is the CEO of Flora-tec Ltd, a grounds maintenance company based in Cambridgeshire.

In my opinion the relationship Carillion had with the auditors KPMG was too cosy, it was like the fox guarding the hen house. Large accountancy firms make massive sums of money from their clients and as such they can lose sight of the real purpose of an audit – which is to provide for shareholders and the revenue a true representation of a company’s affairs. 

It has been highlighted in other cases that this sort of relationship can be damaging, and it is recommended that large companies change their auditors every 5 years so that a degree of impartiality can been maintained. I think a lot of the ordinary shareholders of Carillion have been let down by this relationship and the information they were given was massively flawed.

We had contracts with Carillion for things like grounds maintenance, winter services (such as gritting and snow clearing) and interior landscaping in offices. We had had contracts with Carillion for 15 years. It started off very small and gradually they came to trust us, and we took on a big chunk of work in the corporate sector maintaining offices. 

It was probably the June before, some six or seven months before they went into administration, that the alarm bells started ringing for us. A whistle-blower had raised a concern that large sums of money on their balance sheet were likely to be unrecoverable which sent their share price tumbling. The business then lurched from one crisis to another before going into administration in January 2018. At this time, we were being paid by Carillion on about 45 days due to their reverse factoring arrangement with their banks.

Still, they were my biggest client, and we were still getting paid quite quickly, so we didn’t feel we were running up massive risk with them. I think deep down we felt they were too big to fail, and we just continued as we were because we were tied into fairly lengthy contracts that we couldn't get out of.

 A few months before they eventually went into administration, they started to delay our payments by delaying purchase orders for contract works. This meant we would not be able to invoice for the works so we could not appear as a creditor on their balance sheet. We did eventually get to a point where we refused to attend work which was the only leverage we really had. This was probably in the November, December [2017] before they went bust in the January. It was increasingly difficult to get them to actually raise purchase orders for work.

They did this because if we can’t bill them, we don’t appear as a creditor on their accounts, so it improves their balance sheet because they've got the revenue but not the cost. So, we were being manipulated in that sense, I think.

They couldn’t have gone bust at a worse time for us. The winter services contracts meant a lot of work was done through November and December. Carillion owed us around half a million in winter services when they went bust plus about £150 000 in other services, so £650 000 in total. They went down on the 15th, and our payment was due on the 19th

We only turn over around £8 million so to lose £650,000 pounds was a massive blow for us. We had to almost immediately start to let people go in order to reduce our cost base. Within that first week we'd let ten people of the employed 80 people at that time. That was 12 and a half percent of the entire workforce. We could see we were going to be in a dire position, so anything that wasn't absolutely essential to the business we disposed of. 

Funnily enough, the thing that got us into trouble, the winter services that was the biggest part of the debt, was the thing that got out of trouble because it was a very hard winter - we had the Beast from the East. We lost the money from Carillion, but we continued to work with the administrators to deliver the services to the original clients. The weather was horrendous in January and February, so we recovered a large proportion of what we had lost, far beyond what we expected, and made back possibly about two thirds of the losses against our budget. Pure luck more than anything otherwise we would not be here. 

But it never got quite where it should have been. You can argue my bank account is still £650,000 short of what it should be. We've not had a penny, not a single penny of that money they owe us. If the official receiver is successful in suing KPMG, we might get a little back, but I’m not holding my breath.  

Some of our decision making around continuing to trade with Carillion was based on the fact that they were continuing to be awarded large public sector contracts despite being in a poor financial position. Our thought was “These government departments would have done their due diligence on Carillion.” We took a view that there must be something in that, there must be something behind the scenes they can see that would mean they would still award them public sector contracts. The government were complicit in that they were showing confidence in Carillion by awarding them large amounts of public service contracts. This sent all the wrong signals out to sub-contractors like us who ultimately paid the price on 15th January 2018.

Recent articles

Reader Comments