Carillion 'aggressively managed' reporting of its growing debt mountain, says report

Carillion "aggressively managed" reporting of its debt, says the document released by two House of Commons committees probing the company's collapse in January.

A draft independent business review (IBR) for prospective lenders to the Wolverhampton-based company said the historical year-end and half-year public reporting of Carillion's net debt was managed through "the short-term deferral of payments, acceleration of receipts and receipt of short-term loans from JVs (joint ventures)".

It was drawn up after Carillion had to put aside £1bn of provisions to cover losses on a series of troubled construction contracts. The review warned: "The group's profit warning and the quantum of the provisions taken cast significant doubt on the true historic trading position and cash generation of the business."

The review, commissioned in September 2017 and carried out by FTI Consulting, also said: "Rather than addressing the underlying challenges facing the group in respect of problem contracts and the strength of the balance sheet, transactions were entered into, and accounting treatments and assumptions made, to enhance the reported profitability and net debt position of the group."

Carillion also compensated for "the failure to convert reported profits into cash through the incurrence of further debt (both on and off balance sheet) and the aggressive management of working capital".

The firm's management believed the consultants had overstated the risks and were "too harsh".

However, FTI said the IBR reflected a "balanced view (and not a worst case)".

The review also highlighted "a lack of management attention to (and accountability for) addressing key issues, governance failures over the amount of risk being taken on, and a focus on short-term financial benefits (net debt and cash) at the expense of long-term profitability and viability".

A total of 1,371 Carillion workers have been made redundant since the company went into liquidation in January. The fate of another 8,000 hangs in the balance, including around 400 working at its headquarters in Wolverhampton city centre.

While a string of Carillion's public sector contracts have been taken over by other companies, work is suspended on its construction work at sites like Paradise in Birmingham city centre and the £350m Midland Metropolitan Hospital in Smethwick.

The IBR was released as part of an ongoing inquiry into the firm's collapse by the Commons Business and Work and Pensions Committees.

A spokesman for the former Carillion board said: "The draft IBR was only made available to Carillion for review late afternoon on Saturday January 13.

"Furthermore, the executive summary had not been seen or tested with the company at all and a number of the assertions/statements would have been challenged.

"It is noteworthy that FTI highlight that 'there are a number of strong and profitable underlying businesses' within Carillion, that 'there had been substantial changes to the business' since 10 July 2017 and that the management team had 'taken a significant step in recognising the issues of the past and addressing them'.

"The board and its advisers believed that the very best outcome for all stakeholders would have been a balance sheet restructuring involving a debt to equity swap. Constructive discussions were ongoing to the point of liquidation with both current and new lenders to this end.

"The company was making payments to suppliers every week, no one was prioritised and unfortunately most, if not all, of the company's consultants had outstanding invoices at the point the business went into liquidation."