Two years out, Carillion remains the largest trading liquidation under UK insolvency law. The knock on effects are still generating criminal claims, FRC investigations, auditor (KPMG) partner separations, lender (RBS, HSBC, Santander, Lloyds, and Barclays) surprises, new redundant staff pension liabilities, and major project completion (NHS hospitals; Sunderland and Manchester redevelopment; and Alberta, Canada, highways) and quality problems.
While not compensating for the disaster, it’s also a case study on how the warning signs (as early as 2013 for the most significant concerns) financial reporting and business valuation provided were either ignored or brushed aside.
For instance, the failure to write down acquisition goodwill despite huge and increasing losses, particularly in the case of the Carillion acquisition Eaga, has been cited as one basis for changing the IFRS goodwill reporting standards. BVWire—UK has covered this topic in previous issues.
Several financial reporting and business valuation experts have also addressed the use of supplier financing and other methods to ‘hide’ problems. While perhaps too late, a 2017 report to Carillion’s banks from BVWire—UK subscriber FTI Consulting highlighted ‘aggressive accounting and working capital management.’ And a thoughtful new study on supply chain financing by The Footnotes Analyst shows the leverage, cash-flow, and nondisclosure problems that analysts may miss, even when these financing techniques are valid. While borrowing remains an essential business tool, business valuation experts must understand all the risks and rewards before reaching conclusions of value. As The Footnotes Analyst reports:
We believe that supply chain finance can be a legitimate approach to managing working capital and raising short-term and flexible finance.… The concern regarding supply chain finance is that it is great when a company is successful and growing, but that it can contribute to instability when times are more challenging. It is for this reason that the existence and presentation effects of supply chain finance must be disclosed by companies and why investors need to take note, even where the direct impact is on the reporting company’s customers or suppliers.