Carillion, A Plane From The Sky, And Other Warnings
Today, #BlueMonday, began with the BBC breaking the much-anticipated news: Carillion, the UK's second-biggest construction company, is to go into liquidation threatening thousands of jobs and leaving potential carnage in its supply chain in its wake. This is a fast-moving story with more questions than answers at this stage. It also brings up, once again, the role of effective regulation, including that of audit firms.
As such, it offers an opportunity to highlight some stakeholder research just published on the workings of the Financial Reporting Council (FRC) which has, since June 2016, become the single competent authority for audit in the UK. (The cover photo here reflects my delight at having this blog earn its place in an official FRC name badge at a social event last week to mark its celebration of 25 years of corporate governance, to which I contributed some thoughts. But, for the record, the reason for not writing until now has been illness, not shared prosecco.)
Carillion's sorry state demands many explanations. Its first profit warning was in July. “The fallout from this could be horrendous. The domino reverberations as it travels down the supply chain could be unprecedented” Rudi Klein, chief executive of the Specialist Engineering Contractors’ Group“ told the Financial Times.
Everyone is asking: why did it continue to be awarded more than £2 billion in contracts from the government after its July profits warning ? Its chairman Philip Green has called today a "sad day." Its pension scheme will be one of the largest that has been relegated to the Pension Protection Fund. And its fall-out will continue to reverberate. Balfour Beatty is to take a £45m hit from the collapse, reports the FT this morning - and it's a FTSE250 firm - as is Galliford Try, expecting a £30m-£40m hit - not a small supplier.
The Financial Conduct Authority (FCA) is already investigating Carillion over statements made over seven months up to and including its profit warning.
Carillion's financial results for the six months to June 30th are on its website. KPMG says in its comments at the end on its 'independent review' (p43)" "A review is substantially less in scope than an audit...and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion."
Moving on...to the ComRes stakeholder research for the FRC, which was published on its website late on Friday a week ago, but not issued directly to the media. As it strongly recommends (page 18) visibility and transparency as an answer to perceived conflict of interest around audit "given the recent negative press around the FRC's links to the audit profession and closure of high-profile investigations", it is worth a look.
It is a balanced report, and it gives the FRC due credit on multiple fronts. But it is particularly interesting in the nuances of view it finds between different stakeholders. While the majority of FRC stakeholders (80%) consider the FRC to be independent of the audit profession, look closer and you find that over one-quarter of institutional investors (29%) do not. (p 14).
Just more than half (51%) of stakeholders think the FRC's enforcement of professional standards is about right. But 40% of auditors think the enforcement is too stringent and 45% of institutional investors think it is not stringent enough. (p 16).
Comres suggests its research finds that the FRC needs to be more "outcome-orientated and less process-driven." "In terms of outcomes several stakeholders feel that the FRC 'lacks teeth' as it is either unclear what its enforcement capabilities are, or that a large fine is not an appropriate deterrent" says the report.
This anonymous quote from an auditor - and the report is full of interesting quotes - struck me:
"When a plane falls out of the sky, the initial focus doesn't really seem to be on 'Who can we sue,' or 'Who goes to jail?', It's on, 'How do we stop it happening again?' Just that mind-set is very different to that which seems to currently exist within the enforcement function."
Let us hope that Carillion is not a plane from the sky. On the growing implications for corporate governance on the expanding role of consultancy and professional services firms as they jump onto the AI gravy train, read my latest Governance Watch for a boardroom consultancy.
The Comres research also sheds interesting light on other differing viewpoints between FRC stakeholders - such as non-executive directors (NEDs) as opposed to institutional investors.
NEDs are most likely to report that confidence in corporate governance has risen (58% vs 33% of auditors and institutional investors). On corporate reporting NEDs report a 55% increase in confidence vs just 23% of institutional investors. And on audit 42% of NEDs have increased confidence, as opposed to 24% of company directors.
It looks a little bit, from this research, as if non-executive directors might need to ask more questions.