It's A Long Way Down For Carillion Directors As Corporate Governance Gets Legal
Corporate Governance in Britain is taking a legal route to enforcement in hindsight, and nobody knows quite how to react. Three years after Carillion, then the U.K’s second largest construction company went into liquidation, the new business secretary Kwasi Karteng has launched legal proceedings “in the public interest” to ban former directors from holding senior boardroom positions in the U.K. for a period of up to 15 years. It has been called both “unusual” and “a rare move” in the early media analysis. It certainly sends a message on the U.K’s commitment to standards of governance in business regardless of a pandemic and the distractions of Brexit and comes immediately after Mr Karteng’s declaration of a strong commitment to the need for audit reform.
The Insolvency Service confirmed that on January 12, 2021 the Secretary of State issued company director proceedings against eight directors and former directors of Carillion, including those who had departed before the collapse of the business - CEO Richard Howson and Finance Director Richard Adam - as well as non-executive directors.
Carillion repeatedly made the international headlines for a multitude of reasons. As Reuters reported , in 2018 a U.K. parliamentary committee report said “the government’s overriding priority for outsourcing had been spending as little money as possible while forcing contractors to take unacceptable levels of financial risks. It said the preoccupation with costs had hit the quality of public services because the outsourcing companies were sent a clear signal that cost, rather than quality, was the government’s consistent priority.”
When Carillion went into liquidation in January 2018, it had debts of £1.5 billion and about 420 U.K public sector contracts.
Looking back, I am staggered at how often I felt the need to comment about Carillion in this blog, as this search reveals. For a listed company, it was surprising how many stones one could turn over to find something unpleasant and unexplained moving around underneath. It also cast an interesting light on the lucrative world of FTSE350 companies and the business of board evaluation. A nuanced approach to corporate governance was evident in Mind The Gap Between Regret And Blame When It Comes To Governance.
Today, given the economic pressures on businesses and the last-minute transition deal for the U.K’s exit from the European Union, there is a strong need to reiterate the responsibilities of company directors. When it comes to the preparation of accounts, “the primary responsibility of directors is to prepare accounts which represent reality rather than some sort of fairy tale that will appeal to directors….the board remains ultimately responsible for the accuracy and the completeness of the company’s financial statements” says Bernadette Young, director of independent corporate governance consultancy, Chadwick Corporate Consulting.
Carillion’s 2016 accounts were published in March 2017 and showed the company as profitable and solvent, according to the National Audit Office (NAO) in June 2018, when it said the liquidation of Carillion would cost U.K. taxpayers an estimated £148 million. “Although” said the NAO “ this is subject to a range of uncertainties and it could take years to establish the final cost. There will also be wider costs to the economy, Carillion’s customers, staff, the supply chain and creditors.”
“The Cabinet Office raised Carillion’s risk rating from amber to red in response to the July 2017 profit warning. However, it did not increase Carillion’s rating to its highest rating, ‘high risk’ as it accepted Carillion’s argument that it was already in receipt of the sensitive financial information such a rating would require and that they did not wish to risk precipitating Carillion’s financial collapse” said the NAO.
There were clearly many failings, but fundamentally, the commercial “ecosystem” of business is founded on trust. “Users of company accounts need to believe that the auditors are likely to have uncovered and reported on any misrepresentation of the true position so that they can credibly place reliance on published accounts. If that belief becomes too damaged by audit failings, the whole system of trust on which the commercial ecosystem is founded will be undermined” says Ms Young.
It was the U.K. parliamentary Inquiry report into Carillion, both its directors and its auditors, that sparked the calls for the audit market to be referred to the Competition and Markets Authority with a view to assessing the break-up of the Big Four accountancy firms. There is clearly determination in Kwasi Karteng’s first days as Business Secretary.
“Audit is in need of urgent reform if we are to increase confidence in business and increase the chances of preventing unnecessary corporate failures” said Sir Donald Brydon, the former London Stock Exchange Chairman after his year-long review into the U.K’s auditing industry. In February 2019 the Brydon Review recommended a breakaway from the accounting profession and the formation of a separate industry with its own governing principles.
“What do the users of audit want? – They want to be informed. And if auditors begin with the mindset that the core purpose of audit is to inform people about the company they’re investing in or dealing with, then that changes the mindset dramatically from one which says ‘our duty is to say things that obey arcane accounting rules” said Sir Donald in his report.
The redefining of governance in a fast-changing world full of new challenges should be an ongoing process. In the last few days it looks as if the U.K. government is keen to clarify, define and impose such redefinition as part of its plan to build back better, post-pandemic, with an emphasis on stakeholders. As Ms Young says, “for every moment that the status quo remains and opportunities to improve and strengthen audit remain on the back burner, investors and other stakeholders remain less well informed about potential risks that may lie hidden within the finances and operations of the companies in which they invest, or with whom they interact.”
Cover Image credit: Ivan Bandura @unstable_affliction on Unsplash
