There is little chance of any speedy conclusion to the Carillion scandal: The liquidation will probably run for a decade or more and is likely to generate millions in fees for accountants and lawyers.
The UK lacks effective institutional structures and is thus unable to conduct timely investigation of scandals, introduce reforms or take robust regulatory action. This pattern is set to be repeated for the Carillion scandal which will take years to resolve.
The government has sought to manage the Carillion crisis by urging the Insolvency Service and the Financial Reporting Council (FRC) to fast track their inquiries into the conduct of the directors and auditors.
But hang on a minute, haven’t we heard all this before?
In May 2016, BHS entered administration and the Business Secretary instructed “the Insolvency Service to fast-track its investigation, which will also specifically consider the extent to which the conduct of the directors of BHS led to its insolvency”. Here we are in January 2018 and still awaiting the report. The Insolvency Service has said that it is unlikely to be able to report until 2019 because it does not have sufficient resources. That is some fast-tracking? The BHS inquiry alone is consuming as much as one-tenth of the Insolvency Service resources.
Under pressure from the Work and Pensions Committee, on 27 June 2016 the FRC announced that it will investigate PricewaterhouseCoopers’ (PwC) 2014 audit of BHS. The scope of the inquiry is totally unsatisfactory as BHS was technically insolvent for years before its collapse and pension scheme had a huge deficit since 2005. Some 19 months later, nothing has been heard from the FRC.
The FRC never shows any urgency. We are still awaiting investigation of audit failures leading to the 2007-08 banking crash. Despite request from the House of Commons Treasury Committee, the FRC has failed to carry out a timely and meaningful investigation of the 2007 audit of HBOS. In November 2010, it announced an investigation of the 2009 audit of Connaught Plc conducted by PwC. The final report appeared on 31 May 2017. An investigation of the 2009 audit of Cattles Plc was announced on 23 July 2009 and the final report eventually appeared on 31 August 2016.
On occasions, the FRC has levied fines on errant auditors for failures. For example, Ernst & Young were fined £2,750,000 for failures in the audit of Tech Data Limited. However, the fines are passed to the professional bodies, such as the Institute of Chartered Accountants in England & Wales, rather than used to compensate unsecured creditors, pension schemes or other victims of audit failures.
There is little chance of any speedy conclusion to the Carillion scandal. The liquidation of Carillion will probably run for a decade or more and is likely to generate millions in fees for accountants and lawyers.
For Carillion, David Chapman, a civil servant working for the Insolvency Service, has been appointed as liquidator. He is being advised by six “special managers” from accountancy firm PricewaterhouseCoopers. There will be inevitable wranglings about the ownership of assets, liabilities, contracts, guarantees, claims and counterclaims. The biggest losers will be unsecured creditors, including suppliers, HMRC and the pension scheme. They will be lucky to get anything.
Insolvency practitioners are regulated by their own professional bodies. That regulation has been ineffective for years and won’t help Carillion creditors to recover debts. Liquidators have a priority claim on all cash from the sale of assets i.e. they are paid before anyone else. That creates plenty of incentives to prolong the insolvency. The delay is helpful to liquidators because this bumps up their fees.
Lehman Brothers, a major casualty of the 2007-08 banking crash, entered administration and liquidation in September 2008. Its liquidator PwC has already raked-in over £600m and is on course to collect £1bn in fees. The liquidation may be finalised by 2024. The fraud infested Bank of Credit and Commerce International (BCCI) was forcibly closed by the Bank of England in July 1991. Its liquidation was finalised in May 2012 and the liquidators chalked up fees of $656m (£415m). Perhaps, the record for prolonged liquidation goes to the Israel-British Bank which collapsed in 1974 amidst the secondary banking crash. In September 2009, after 35 years, PwC announced that the liquidation has been finalised.
At the time of scandals ministers promise speedy action, reforms and retribution. This makes good press and disarms journalists and critics, but little of that materialises. Carillion is unlikely to be the exception because the UK lacks independent and effective institutional structures. The biggest winners will be accountants and lawyers feasting on the carcass of Carillion. Yes, the group that collected vast fees by delivering duff accounting and audits, advising companies on financial engineering and tax dodging. They also conduct the last rites of companies to enrich themselves whilst unsecured creditors take the biggest hit.
Prem Sikka is Professor of Accounting at University of Sheffield and Emeritus Professor of Accounting at University of Essex. He tweets here.
To reach hundreds of thousands of new readers and to make the biggest impact we can in the next general election, we need to grow our donor base substantially.
That's why in 2024, we are seeking to generate 150 additional regular donors to support Left Foot Forward's work.
We still need another 124 people to donate to hit the target. You can help. Donate today.
7 Responses to “Here’s why the Carillion scandal will last for decades”
nhsgp
Socialist welfare state.
Assets zero
Liabilities 8,500 bn for the state pension
Civil service pensions
Assets zero
Liabilities 1,500 bn
You’re in no position to lecture when you are that incompetent.
For a professor of accounting not to have spotted that the state says it uses IFRS rules, and then ignores IAS 37 makes me extremely concerned about your students in the real world.
Perhaps they ended up at Carillion.
Michael Burt
We talk about corruption in other countries but never recognise corruption in our own country.
Our regulatory bodies are set up to be ineffective, it simply provides well paid jobs for the Boys.
Carillion has been a mechanism to syphon off tax payers money into Private pockets. Tony Blair was as guilty as anyone in that respect with PFI. Until people recognise the problems we have and act accordingly then it will never change. It would help if we had a media which which exposed the failings instead of supporting them.
patrick newman
Laid bare here is the urgent need for radical reform of how large companies are dealt with when they get into trouble. There are clearly many moral hazards and perverse incentives. Failing executives appear not be accountable for their neglect and incompetence and it appears that audit companies suffer little consequences for their neglect and/or corruption. This will only change when rogue directors are prosecuted and jailed. May’s government will do nothing about this major fault line in company regulation. Labour must be ready with legislative proposals for when it gets into office.
Das
The establishment, with or without it’s connections, has been burning the candle’s at both ends hoping that no one will notice and, if they do, hope they realise there’s nothing they can do to stop it.
Ron Stott
I was a director in a small private company for twenty years. My experience of liquidations was disturbing. In one case the liquidator was administering the insolvent company and charging hefty fees. When the money ran out and could not meet their bills they sold the residual assets for pea nuts. This was typical.