Carillion: House of Commons Business, Energy and Industrial Strategy and Work and Pensions Committees

House of Commons
Business, Energy and Industrial

Strategy and Work and Pensions
Committees
Carillion
Second Joint report from the Business, Energy

and Industrial Strategy and Work and Pensions
Committees of Session 2017–19
Tenth Report of the Business, Energy and

Industrial Strategy Committee of Session
2017–19
Twelfth Report of the Work and Pensions

Committee of Session 2017–19
Report, together with formal minutes relating

to the report
Ordered by the House of Commons

to be printed 9 May 2018
HC 769
Published on 16 May 2018
by authority of the House of Commons
Business, Energy and Industrial Strategy Committee
The Business, Energy and Industrial Strategy Committee is appointed by the
House of Commons to examine the expenditure, administration, and policy of the
Department for Business, Energy and Industrial Strategy.
Current membership
Rachel Reeves MP (Labour, Leeds West) (Chair)

Vernon Coaker MP (Labour, Gedling)
Drew Hendry MP (Scottish National Party, Inverness, Nairn, Badenoch and Strathspey)
Stephen Kerr MP (Conservative, Stirling)
Peter Kyle MP (Labour, Hove)
Mr Ian Liddell-Grainger MP (Conservative, Bridgwater and West Somerset)
Rachel Maclean MP (Conservative, Redditch)
Albert Owen MP (Labour, Ynys Môn)
Mark Pawsey MP (Conservative, Rugby)
Antoinette Sandbach MP (Conservative, Eddisbury)
Anna Turley MP (Labour (Co-op), Redcar)
Powers
The Committee is one of the departmental select committees, the powers of which
are set out in House of Commons Standing Orders, principally in SO No 152. These
are available on the internet via www.parliament.uk.
Publication
Committee reports are published on the Committee’s website at

www.parliament.uk/beis and in print by Order of the House.
Evidence relating to this report is published on the inquiry publications page of the
Committee’s website.
Committee staff
The current staff of the Committee are Chris Shaw (Clerk), Ben Sneddon (Second
Clerk), Jeanne Delebarre (Assistant Clerk), Ian Cruse, (Committee Specialist), Becky
Mawhood (Committee Specialist), James McQuade (Senior Committee Assistant),
Jonathan Olivier Wright (Committee Assistant) and Gary Calder (Media Officer).
Contacts
All correspondence should be addressed to the Clerk of the Business, Energy

and Industrial Strategy Committee, House of Commons, London SW1A 0AA. The
telephone number for general enquiries is 020 7219 5777; the Committee’s email
address is [email protected].
Work and Pensions Committee
The Work and Pensions Committee is appointed by the House of Commons to
examine the expenditure, administration, and policy of the Department for Work
and Pensions and its associated public bodies.
Current membership
Rt Hon Frank Field MP (Labour, Birkenhead) (Chair)

Heidi Allen MP (Conservative, South Cambridgeshire)
Andrew Bowie MP (Conservative, West Aberdeenshire and Kincardine)
Jack Brereton MP (Conservative, Stoke-on-Trent South)
Alex Burghart MP (Conservative, Brentwood and Ongar)
Neil Coyle MP (Labour, Bermondsey and Old Southwark)
Emma Dent Coad MP (Labour, Kensington)
Ruth George MP (Labour, High Peak)
Steve McCabe MP (Labour, Birmingham, Selly Oak)
Nigel Mills MP (Conservative, Amber Valley)
Chris Stephens MP (Scottish National Party, Glasgow South West)
Powers
The Committee is one of the departmental select committees, the powers of which
are set out in House of Commons Standing Orders, principally in SO No 152. These
are available on the internet via www.parliament.uk.
Publication
Committee reports are published on the publications page of the Committee’s

website and in print by Order of the House.
Evidence relating to this report is published on the inquiry page of the
Committee’s website.
Committee staff
The current staff of the Committee are Adam Mellows-Facer (Clerk), Katy Stout
(Second Clerk), Libby McEnhill (Committee Specialist), Rod McInnes (Committee
Specialist), Tom Tyson (Committee Specialist), Jessica Bridges-Palmer (Senior Media
and Policy Officer), Esther Goosey (Senior Committee Assistant), Michelle Garratty
(Committee Assistant) and Ellen Watson (Assistant Policy Analyst).
Contacts
All correspondence should be addressed to the Clerk of the Work and Pensions
Committee, House of Commons, London SW1A 0AA. The telephone number
for general enquiries is 020 7219 8976; the Committee’s email address is
[email protected].
Carillion 1
Contents
Summary3
Introduction7
Our inquiry 7
The company and timeline 8
Timeline of key events 8
1 Carillion plc 13
Business approach 13
Dash for cash 13
Dividends16
Pension schemes 19
Suppliers24
Corporate governance 26
Key board figures 27
Financial reports 36
Financial performance up to July 2017 36
July 2017 trading update 37
Aggressive accounting 39
Carillion’s finance directors 44
Conclusions on Carillion’s board 46
2 External checks and balances 48

Investors48
Auditors51
Advisors53
Pension trustees 56
The Pensions Regulator 57
Financial Reporting Council 60
Role of Government 62
Crown Representative 62
Government support 62
Insolvency Service 63
Corporate law 66
Wrongful trading 66
Directors’ duties 67
Winners and losers 68
2 Carillion
3 Lessons 69
Government responsibilities 69
Government relationships with strategic suppliers 69
Prompt Payment Code 70
Corporate Culture 70
Investors and stewardship 71
The Pensions Regulator 73
Financial Reporting Council 77
The Big Four 79
Conclusions85
Conclusions and recommendations 87
Formal minutes 97
Witnesses98
List of Reports from the Business, Energy and Industrial Strategy Committee
during the current Parliament 99
List of Reports from the Work and Pensions Committee during the current
Parliament100
Carillion 3
Summary
Carillion’s rise and spectacular fall was a story of recklessness, hubris and greed. Its
business model was a relentless dash for cash, driven by acquisitions, rising debt,
expansion into new markets and exploitation of suppliers. It presented accounts that
misrepresented the reality of the business, and increased its dividend every year, come
what may. Long term obligations, such as adequately funding its pension schemes, were
treated with contempt. Even as the company very publicly began to unravel, the board
was concerned with increasing and protecting generous executive bonuses. Carillion
was unsustainable. The mystery is not that it collapsed, but that it lasted so long.
Carillion and its collapse
Carillion was an important company. Its collapse will have significant and as yet
uncertain consequences, not least for public service provision:
• It had around 43,000 employees, including 19,000 in the UK. Many more
people were employed in its extensive supply chains. So far, over 2,000 people
have lost their jobs.
• Carillion left a pension liability of around £2.6 billion. The 27,000 members of
its defined benefit pension schemes will now be paid reduced pensions by the
Pension Protection Fund, which faces its largest ever hit.
• It also owed around £2 billion to its 30,000 suppliers, sub-contractors and

other short-term creditors, of whom it was a notorious late payer. Like the
pension schemes, they will get little back from the liquidation.
• Carillion was a major strategic supplier to the UK public sector, its work
spanning from building roads and hospitals to providing school meals and
defence accommodation. The Government has already committed £150
million of taxpayers’ money to keeping essential services running.
• Carillion’s collapse was sudden and from a publicly-stated position of

strength. The company’s 2016 accounts, published on 1 March 2017, presented
a rosy picture. On the back of those results, it paid a record dividend of £79
million—£55 million of which was paid on 10 June 2017. It also awarded large
performance bonuses to senior executives. On 10 July 2017, just four months
after the accounts were published, the company announced a reduction of £845
million in the value of its contracts in a profit warning. This was increased to
£1,045 million in September 2017, the company’s previous seven years’ profits
combined. Carillion went into liquidation in January 2018 with liabilities of
nearly £7 billion and just £29 million in cash.
Carillion’s board
Carillion’s board are both responsible and culpable for the company’s failure. They
presented to us as self-pitying victims of a maelstrom of coincidental and unforeseeable
mishaps. Chiefly, they pointed to difficulties in a few key contracts in the Middle East.
4 Carillion
But the problems that caused the collapse of Carillion were long in the making, as too
was the rotten corporate culture that allowed them to occur. We are particularly critical
of three key figures:
• Richard Adam was Carillion’s Finance Director for 10 years. He was the
architect of Carillion’s aggressive accounting policies and resolutely refused
to make adequate contributions to the company’s pension schemes, which he
considered a “waste of money”. His voluntary departure at the end of 2016 and
subsequent sale of all his shares were the actions of a man who knew where
the company was heading.
• Richard Howson, Chief Executive from 2012 to 2017, was the figurehead for
a business that careered progressively out of control under his misguidedly
self-assured leadership.
• Philip Green joined the board in 2011 and became Chairman in 2014. He was
an unquestioning optimist when his role was to challenge. Remarkably, to the
end he thought he was the man to head a “new leadership team”.
We recommend that the Insolvency Service, in its investigation into the conduct of
former directors of Carillion, includes careful consideration of potential breaches of
duties under the Companies Act, as part of their assessment of whether to take action
for those breaches or to recommend to the Secretary of State action for disqualification
as a director.
Checks and balances
A system of internal and external checks and balances are supposed to prevent board
failures of the degree evident in Carillion. These all failed:
• The company’s non-executive directors failed to scrutinise or challenge

reckless executives.
• Carillion’s accounts were systematically manipulated to make optimistic

assessments of revenue, in defiance of internal controls. Despite being
signatories of the Prompt Payment Code, Carillion treated suppliers with
contempt, enforcing standard payment terms of 120 days. Suppliers could
be paid earlier in return for a fee, a wheeze that Carillion used to effectively
borrow more, under the radar.
• KMPG was paid £29 million to act as Carillion’s auditor for 19 years. It did
not once qualify its audit opinion, complacently signing off the directors’
increasingly fantastical figures. In failing to exercise professional scepticism
towards Carillion’s accounting judgements over the course of its tenure as
Carilion’s auditor, KPMG was complicit in them.
• Carillion paid other big-name firms as badges of credibility in return for

lucrative fees. Deloitte, paid over £10 million by the company to act as its
internal auditor, failed in its risk management and financial controls role. EY
was paid £10.8 million for six months of failed turnaround advice.
Carillion 5
• The company’s shareholders suffered from an absence of reliable information

and were ill-equipped to influence board decision-making. In the main, they
sold their shares instead.
• The key regulators, the Financial Reporting Council (FRC) and the Pensions
Regulator (TPR), were united in their feebleness and timidity. The FRC
identified concerns in the Carillion accounts in 2015 but failed to follow them
up. TPR threatened on seven occasions to use a power to enforce pension
contributions that it has never used. These were empty threats; the Carillion
directors knew it and got their way.
• The Government’s Crown Representative system provided little warning of

risks in a key strategic supplier. We recommend an immediate review of that
system.
• It is far from apparent that the potential for legal action for wrongful trading
or failure to exercise directors’ duties acted as a restraint on the behaviour of
the board.
The lessons of Carillion
Most companies are not run with Carillion’s reckless short-termism, and most company
directors are far more concerned by the wider consequences of their actions than the
Carillion board. But that should not obscure the fact that Carillion became a giant
and unsustainable corporate time bomb in a regulatory and legal environment still in
existence today. The individuals who failed in their responsibilities, in running Carillion
and in challenging, advising or regulating it, were often acting entirely in line with their
personal incentives. Carillion could happen again, and soon.
The economic system is predicated on strong investor engagement, yet the mechanisms
and incentives to support engagement are weak. This makes regulators such as the FRC
and TPR more important. The Government has recognised the regulatory weaknesses
exposed by this and other corporate failures, but its responses have been cautious,
largely technical, and characterised by seemingly endless consultation. It has lacked
the decisiveness or bravery to pursue bold measures recommended by our select
committees that could make a significant difference. That must change. That does not
just mean giving the FRC and TPR greater powers. Chronically passive, they do not
seek to influence corporate decision-making with the realistic threat of intervention.
Action is part of their brief. They require cultural change as well.
There is a danger of a crisis of confidence in the audit profession. KPMG’s audits of

Carillion were not isolated failures, but symptomatic of a market which works for
the Big Four firms but fails the wider economy. There are conflicts of interest at every
turn. KPMG were Carillion’s external auditors, Deloitte were internal auditors and EY
were tasked with turning the company around. Though PwC had variously advised
the company, its pension schemes and the Government on Carillion contracts, it was
the least conflicted of the Four and could name its price as Special Manager of the
liquidation. Waiting for a more competitive market that promotes quality and trust
in audits has failed. It is time for a radically different approach. We recommend that
6 Carillion
the Government refers the statutory audit market to the Competition and Markets
Authority. The terms of reference of that review should explicitly include consideration
of both breaking up the Big Four into more audit firms, and detaching audit arms from
those providing other professional services.
Correcting the systemic flaws exposed by the Carillion case is a huge challenge. But
it can serve as an opportunity for the Government. It can grasp the initiative with
an ambitious and wide-ranging set of reforms that reset our systems of corporate
accountability in the long-term public interest. It would have our support in doing so.
Carillion 7
Introduction
Our inquiry
1. Companies collapse. It is a standard part of the business life cycle. The demise of
a major company does not in itself warrant a parliamentary inquiry. Carillion, a major
UK multinational construction and facilities management company which entered
compulsory liquidation in January 2018, was, however, a very unusual case:
• Carillion’s collapse was sudden and from a publicly-stated position of strength.

It went into liquidation in January 2018 with liabilities of nearly £7 billion and
just £29 million in cash. Yet it had paid a record dividend of £79 million and
large bonuses to senior executives for performance in 2016.
• The company’s 2016 accounts, published in March 2017, were certified true and
fair by its auditor, KPMG. In July 2017, the company issued a profit warning
which announced a reduction of £845 million in the value of its contracts.
This was increased to £1,045 million in September 2017, the exact value of the
previous seven years’ profits combined.
• Carillion left a pensions liability of around £2.6 billion and its schemes are set to
be the largest ever hit on the Pension Protection Fund (PPF), which is partfunded
by a levy on other pension schemes.
• Carillion also owed around £2 billion to its 30,000 suppliers, sub-contractors

and other short-term creditors, of whom it was a notorious late payer. Like the
pension schemes, they will get little back from the liquidation.
• Carillion was a major strategic supplier to the UK public sector and had around
450 construction and service contracts across government.
• The Government has committed an initial £150 million of public funds to ensure
continuity of public services provided by Carillion.
Carillion was no ordinary company, and no ordinary collapse.
2. We chose to work together on Carillion, as our predecessor Committees did on BHS,

because it is impossible to consider the management of the pension schemes without
considering that of their sponsor company. Our inquiry did not consider Government
decisions to award major contracts to Carillion. Those matters will be considered by the
National Audit Office, the Public Accounts Committee and the Public Administration
and Constitutional Affairs Committee in subsequent reports. We have also taken steps
to ensure that we have not interfered with official investigations being undertaken by the
Insolvency Service (IS), Financial Reporting Council (FRC), Financial Conduct Authority
(FCA) and the Pensions Regulator (TPR). Our inquiry enabled the reasons for the collapse
of Carillion, and its lessons for Government policy, to be considered in public. This report
sets out our findings from that work. It is split into two parts. First, we consider the business
and the reasons for its failure, together with the failure of various checks and balances on
corporate conduct. Second, we consider the wider policy implications of the case.
8 Carillion
3. Over the course of the inquiry, we took evidence from Carillion’s regulators, its
investors, its advisors, its pension trustees, and from Carillion’s directors during its final
years. We also heard from the Secretary of State for Work and Pensions and the Secretary of
State for Business, Energy and Industrial Strategy to examine the Government’s long-term
response to the collapse of the company. In addition to oral evidence and correspondence
with Carillion’s stakeholders, we sought and received minutes and papers of Carillion’s
board and its committees from the Official Receiver, many of which we have published
as part of the inquiry. We are grateful to the Official Receiver and his staff for their work
in providing these documents to aid our scrutiny. Similarly, the pension scheme trustees
were particularly forthcoming in response to our requests for documents. Our work was
aided by Gabriel Moss QC and Hannah Thornley, both of South Square Chambers, and
Professor Prem Sikka, who have acted as our Specialist Advisers. We are very grateful for
their work.
The company and timeline

4. Before its collapse, Carillion was the second largest construction company in the
UK. It had around 43,000 employees, including 19,000 in the UK. Many more people
were employed in its extensive supply chains. It had pension obligations to around 27,000
members of its defined benefit (DB) pension schemes. Carillion’s work spanned the public
and private sector and extended beyond the UK, with notable contracts in the Middle
East and Canada. Its work for the UK government accounted for 38% of its reported 2016
revenues and spanned from building roads and hospitals to providing school meals and
defence accommodation.1
Timeline of key events
Date Event
February 2006 Acquisition of Mowlem for £350 million.2
April 2007 Richard Adam appointed to board as Finance Director.3
February 2008 Acquisition of Alfred McAlpine for £565 million.4
December 2008 Pension valuation.
December 2009 Richard Howson appointed to board as Executive Director.5
March 2010 2008 pension valuation 15-month deadline.
September 2010 Richard Howson appointed Chief Operating Officer, remaining on
the board.6
October 2010 2008 pension valuation agreed.
April 2011 Acquisition of Eaga for £298 million.7
June 2011 Philip Green appointed to board as Senior Non-Executive Director.8
December 2011 Pension valuation.
January 2012 Richard Howson appointed Chief Executive.9
March 2013 2011 pension valuation 15-month deadline.
December 2013 Pension valuation.10
Alison Horner appointed to board as Non-Executive Director.11

May 2014 Philip Green appointed Chairman.12
1 Department for Work and Pensions and the Insolvency Service, Carillion declares insolvency: information for
employees, creditors and suppliers, published 15 January 2018, updated 16 January 2018
Carillion 9
Date Event
June 2014 2011 pension valuation agreed.13
December 2014 2013 pension valuation agreed.14
July 2015 Keith Cochrane appointed to board as Senior Independent Non-
Executive Director.15
December 2016 Richard Adam retired as Finance Director.16
2017
1 January Zafar Khan appointed to board as Finance Director.17
1 March 2016 Annual Report and Accounts signed and published.18
Richard Adam sold entire existing shareholding for £534,000.19

~End March–15 Emma Mercer returned to UK as Finance Director of Construction
April Services and brought to the attention of Richard Howson and Zafar
Khan “some issues with which she was not comfortable”.20
8 May Richard Adam’s long-term incentive plan awards for 2014 vested.
He sold the total amount for £242,000.21
May The board conducted a review of accounting treatment for
receivables following Ms Mercer’s concerns. This was reviewed by
KPMG. The review concluded that assets had been misclassified but
there had been no misstatement of revenue. Acted as a trigger for
wider review of contract positions.
7 June The board held a “lessons learned” exercise which considered
cultural, managerial and operational shortcomings.22
8 June The board considered a presentation on a possible equity issue.23
9 June Final dividend for 2016 paid worth £55 million.
4–5 July The Chairman, and board the following day, were informed that
their brokers were not able to underwrite the proposed equity
issue and were advised that a trading update should be made on
10 July. Philip Green remained hopeful for a “positive and upbeat”
announcement to the market.24
9 July Richard Howson stepped down as Chief Executive. Replaced by
Keith Cochrane as Interim Chief Executive.
The board agrees a contract provision of £845 million to be

included in their interim 2017 financial results.25
10 July Carillion announced the £845m contract provision and
comprehensive review of the Group’s business and capital
structure.26
12 July Carillion’s share value fell 70% from 10 July.27
14 July EY appointed to support its strategic review with a focus on cost
reduction and cash collection. HSBC appointed as new broker.28
August The board identified a need to put in place further short term
committed bank facilities.29
3 September Zafar Khan “spooked” the board with a financial update.30
11 September Zafar Khan sacked as Finance Director and Emma Mercer appointed
as his replacement. New non-executive directors appointed and
Transformation Officer seconded in from EY.31
29 September Half-year results included a further £200m profit write down.32
24 October Deferral of pension deficit contributions agreed, releasing £100
million unsecured and £40 million secured new bank finance.33
10 Carillion
Date Event
17 November Third profit warning issued, alongside announcement that the
company was heading towards a breach of its debt covenants.34
First week of Changed assumptions in weekly cashflow materially reduced the
December company’s short-term cashflow forecasts.35
11 December Kiltearn Partners, the largest shareholder in Carillion, halved its
stake.36
22 December Cashflow forecast delivered to finance creditors showed the
company would have less than £20 million of available cash in
March 2018. As a result, it was unable to make further drawings
under its £100 million unsecured facility without further waivers
being granted by each of them.37
Late December New lenders informed the company that a further waiver would
not be given unless an approach was made by the company to
Government.38
31 December The company submitted a formal request for support to
Government.39
2018
3 January FCA notified Carillion that it had commenced an investigation into
the timeliness of announcements made by the company between 7
December 2016 and 10 July 2017.40
4 January The Company met Government officials to discuss status of
restructuring efforts and the need for short and long-term
funding.41
9 January The Company met with HMRC to explore the possibility of deferred
payment to in respect of tax liabilities, which were otherwise due
in January, February, March and April 2018. The outcome was
inconclusive.42
12 January Carillion paid £6.4 million to a series of advisors and lawyers,
including KPMG (£78,000), FTI Consulting (£1m), EY (£2.5m),
Slaughter and May (£1.2m).43
13 January The company sent a letter to Cabinet Office making a final request
of £160 million, including an immediate £10 million.44
14 January Cabinet Office informed the company that it would not be willing
to provide such support to the company.
The board concluded that the company was insolvent.45

15 January Directors presented a petition to the Court for the compulsory
winding up of the company on the grounds it was unable to pay its
debts.46 Accepted by the Courts and Official Receiver appointed as
liquidator, with PwC appointed as Special Managers to assist with
the liquidation.
Government announced they were making £150 million available

to support the liquidation and laying a contingent liability to
indemnify the Official Receiver.47
16 January Greg Clark MP, Business Secretary, wrote to the Insolvency
Service and the Official Receiver asking them to fast-track their
investigation into the causes of Carillion’s failure and the conduct
of the directors.48
18 January TPR announced they were launching an anti-avoidance
investigation into Carillion’s funding of their pension schemes.49
Carillion 11
Date Event
24 January Work and Pensions and Business, Energy and Industrial Strategy
Committees launched a joint inquiry into the management and
governance of Carillion, its sponsorship of its pension schemes
and wider implications for company and pension scheme law,
regulation and policy.
29 January FRC announced investigations into the 2014, 2015 and 2016 KPMG
audits of Carillion.50
19 March FRC announced investigation into the preparation and approval of
Carillion’s financial statements by Richard Adam and Zafar Khan.51
2 Carillion plc, Annual Report and Accounts 2006, p 74

3 Companies House, Carillion plc Officers, accessed 1 May 2018
10 Brought forward from December 2014 and based on same assumptions used for previous valuation.
12 Carillion plc, Annual Report and Accounts 2014
13 Mercer, Carillion (DB) pension trustee limited scheme funding report actuarial valuations as at 31 December
2013, p 1
14 As above.
16 As above.
17 As above.
18 Carillion plc, Annual Report and Accounts 2016
19 Letter from Richard Adam to the Chairs, 20 February 2018
20 Carillion plc, Minutes of a meeting of the Board of Directors, 9 May 2017
22 Lessons learned Board pack and minutes, 7 June 2017
23 Carillion plc, Minutes of a meeting of the Board of Directors, 8 June 2017
24 Carillion plc, Minutes of a meeting of the Board of Directors, 5 July 2017
26 Carillion plc, H1 2017 Trading Update, 10 July 2017, accessed 1 May 2018
27 London Stock Exchange, Carillion share price, accessed 1 May 2018
28 High Court of Justice, In the matter of Carillion plc and in the matter of the Insolvency Act 1986, Exhibit: KC1 -
First witness statement of Keith Robertson Cochrane, Dated: 15 January 2018 (Not published)
29 As above.
30 Q314; Letter from Philip Green to the Chairs, 20 February 2018
31 London Stock Exchange, Carillion plc Directorate Change, 11 September 2017
32 Carillion plc, Financial results for the six months ended 30 June 2017, 29 September 2017
34 Update on discussions with stakeholders, trading and financial covenants deferral, 17 November 2017
First Witness Statement of Keith Robertson Cochrane, Dated: 15 January 2018 (Not published)
36 London Stock Exchange, Carillion plc Notification of major holdings, 11 December 2017
38 As above.
39 As above
40 London Stock Exchange, Carillon plc Regulatory investigation announcement, 3 January 2018
42 As above
12 Carillion
43 . Business, Energy and Industrial Strategy Committee and Work and Pensions Committee, Carillion paid out £6.4
million to advisors before £10 million taxpayer bailout, 12 March 2018
44 Summary of short term funding proposal, and status update, 13 January 2018 and letter from Carillion to
Cabinet Office, 13 January 2018
46 As above
47 . HMT, Central Government supply estimates 2017-18, Supplementary estimates, February 2018
48 The collapse of Carillion, Briefing Paper 8206, House of Commons Library, March 2018
49 Letter from The Pensions Regulator to the Chair regarding Carillion, 12 February 2018
50 Financial Reporting Council, Investigation into the audit of the financial statements of Carillion plc, 29 January
2018
51 Financial Reporting Council, Investigation into the preparation and approval of the financial statements of
Carillion plc, 19 March 2018
Carillion 13
1 Carillion plc
Business approach
Dash for cash
Acquisitions
5. Carillion demerged from Tarmac in 1999. Highly ambitious, it grew quickly and
expanded beyond its roots in the construction sector into facilities management. Much
of this growth was driven by acquisitions. By purchasing rivals such as Mowlem and
Alfred McAlpine, Carillion removed competitors for major contracts. Already the second
biggest construction firm in the UK,52 Carillion attempted to become the biggest in 2014
by merging with the only larger firm, Balfour Beatty.53 This move was, however, rejected
after the Balfour Beatty board dismissed Carillion’s claims that the merger would generate
cost-savings of £175 million a year in “synergies”, the benefits of working together.54
6. Given Carillion’s record in achieving cost savings through mergers and acquisitions,
Balfour Beatty was right to be sceptical. For example, in 2011, Carillion purchased Eaga, a
supplier of heating and renewable energy services.55 Prior to the purchase, Eaga had made
accumulated profits of £31 million.56 Five consecutive years of losses followed, totalling
£260 million at the end of 2016.57 The disastrous purchase cost Carillion £298 million.58 This
came at a time Carillion was refusing to commit further funds to addressing a pension
deficit of £605 million. That problem itself was largely attributable to acquisitions: when
Carillion bought Mowlem for £350 million in 2006 and Alfred McAlpine for £565 million
in 2008 it also bought responsibility for their pension scheme deficits.59 It was storing up
problems for the future.
7. Carillion’s spending spree also enabled one of the more questionable accounting
practices which featured in its eventual demise. Carillion purchased Mowlem, Alfred
McAlpine and Eaga for substantially more than their tangible net assets. The difference
between the net assets and the amount paid is accounted as “goodwill”. Goodwill is the
intangible assets of the company being purchased. These might include the skills and
experience of the workforce, the company brand, and synergies with the purchasing
company. The value of the goodwill recorded on Carillion’s balance sheet for each of
those purchases was higher than the purchase prices themselves. Carillion acquired £431
million of goodwill from Mowlem, £615 million from Alfred McAlpine and £329 million
from Eaga.60 As those figures are simply the arithmetic difference between the purchase
price and the net tangible assets of the company, their accuracy as an assessment of the
52 The Construction Index, Top 100 construction companies 2014, accessed 1 May 2018
53 Carillion retained its position as the second largest UK construction firm between 2009 and 2017, behind Balfour
Beatty in each year.
54 “Balfour Beatty: five reasons why the Carillion merger won’t work”, Daily Telegraph, 15 August 2014
55 Eaga was renamed Carillion Energy Services.
56 Carillion Energy Services Ltd, Directors’ report and financial statements for the period ended 31 December 2012,
p9
57 Carillion Energy Services Ltd, Annual report and financial statements, 2011–2016
59 Carillion plc, Annual Report and Accounts 2006, p 74; Carillion plc, Annual Report and Accounts 2008, p 101
60 Carillion plc, Annual Report and Accounts 2006, p 74; Carillion plc, Annual Report and Accounts 2008, p 101;
Carillion plc, Annual Report and Accounts 2011, p 92
14 Carillion
intangible assets purchased is entirely dependent on the appropriateness of the price

paid. As we consider later in this report, these large and uncertain intangible assets also
continued to prop up Carillion’s balance sheet for the remainder of its existence.
Debt
8. Carillion rejected opportunities to inject equity into the growing company and instead
funded its spending spree through debt. Borrowing increased substantially between 2006
and 2008 as Mowlem and Alfred McAlpine were bought.61 It then almost trebled between
2010 and 2012 to help fund the Eaga purchase. The accumulation of debt, and inability
to reduce it, caused concerns among Carillion’s investors. Standard Life Investments
began selling its shares in the company from December 2015 onwards,62 citing a high
debt burden that was unlikely to reduce in the near term due to acquisitions and a high
dividend pay-out.63 As we discuss later in this chapter, in early 2015 UBS claimed total
debt was higher than Carillion were publicly stating, triggering a big increase in investors
short selling, or betting against, Carillion’s shares.64
Figure 1: Carillion’s total borrowing
£m
1,100
1,000
900
800
700
600
500
400
300
200
100
0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
interim
Source: Carillion plc Annual Report and Accounts 2005–2017
9. Carillion’s growing net debt appeared to be of little concern to the board until the
company was in dire straits. Keith Cochrane, non-executive director from July 2015 until
becoming interim Chief Executive in July 2017, described net debt and the pension deficit
as “lesser concerns” in 2015.65 Looking back, however, company directors acknowledged
61 Mowlem cost £350 million - Carillion plc, Annual Report and Accounts 2006, p 74 and Alfred McAlpine £565
million, Carillion plc, Annual Report and Accounts 2008, p 101
62 Standard Life Investments merged with Aberdeen Asset Management in August 2017 to form Standard Life
Aberdeen
63 Letter from Standard Life Aberdeen to the Chairs, 2 February 2018
64 Carillion plc, Minutes of a meeting of the Board of Directors, 2 April 2015
65 Q233 [Keith Cochrane]
Carillion 15
that their position was unsustainable. Philip Green, non-executive director from June
2011 and Chairman since May 2014,66 told us that he regretted the board “did not reduce
net debt sooner” and conceded that they were too slow to explore the opportunity of
raising equity rather than relying on debt.67
Expansion
10. While Carillion’s acquisitions had enabled it to purchase rivals for its home turf,
in Mowlem and Alfred McAlpine, and expand into the new market of energy efficiency
services, in the case of Eaga, they had not delivered the returns the company had projected.
Richard Howson, Chief Executive from January 2012 to July 2017, explained that the
company turned its attention to bidding aggressively on contracts to generate cash:
We did not have any money to buy competitors, as we had done in the past.
We had to win our work organically. We had to bid and we had to win […]68
Expansion into new markets was a key part of Carillion’s strategy, and led to ventures into
Canada, the Caribbean and the Middle East as it sought opportunities for growth.
11. Carillion’s forays overseas were largely disastrous. The most notorious example was a
2011 contract with Msheireb Properties, a Qatari company, to build residential, hotel and
office buildings in Doha. The project was due to complete in 2014, but remains unfinished.69
We heard claim and counter-claim from Carillion’s directors and Msheireb Properties,
who each said the other owed them £200 million.70 Regardless of the true picture—and
we are baffled that neither the internal nor external auditors could tell us—it is abundantly
clear that the contract was not well-managed by Carillion. A July 2017 Carillion board
“lessons learned” pack conceded as much, citing the company’s weak supply chain, poor
planning and failure to understand the design requirements up front.71 Carillion also had
difficulty adapting to local business practices. Richard Howson, who after being sacked as
Chief Executive in July 2017 was retained in a new role to maintain morale and negotiate
payment in key failing contracts,72 explained, “working in the Middle East is very different
to working anywhere else in the world”.73
12. Carillion’s directors attempted to ascribe the company’s collapse to unforeseeable

failings in a few rogue contracts. But, responding to difficulties in UK construction,
Carillion knowingly entered risky new markets.74 A 2009 board strategy paper rated the
Dubai market outlook as 3/10,75 but Carillion’s 2010 annual report said it would “target
new work selectively” in the City.76 With reference to Carillion’s problems with Msheireb,
Richard Howson told us “we only won, thankfully, one construction project in Qatar”.77
66 Philip Green is not to be confused with Sir Philip Green of Arcadia and, previously, BHS.
67 Letter from Philip Green to the Chairs, 21 February 2018
68 Q606 [Richard Howson]
69 Letter from Msheireb Properties to the Chairs, 27 February 2018
70 Q482 [Richard Howson]; Letter from Msheireb Properties to the Chairs, 27 February 2018
71 Carillion plc, Minutes of a meeting of the Board of Directors, 7 June 2017 (not published)
72 Letter from Richard Howson to the Chairs, 21 February 2018
75 Carillion plc, November Board meeting Board Strategy Session, November 2009
16 Carillion
Yet Carillion bid for 13 construction contracts in that country between 2010 and 2014.78
The overriding impression is that Carillion’s overseas contract problems lay not in a few
rogue deals, but in a deliberate, naïve and hubristic strategy.
13. The July 2017 lessons learned pack highlighted the breadth of problems in Carillion’s
contract management.79 Andrew Dougal, Chair of the audit committee, noted there
appeared to be a “push for cash at period end”, which would reflect well in published
results, and “inadequate reviews on operational contracts”.80 As a large company and
competitive bidder, Carillion was well-placed to win contracts. Its failings in subsequently
managing them to generate profit was masked for a long time by a continuing stream of
new work and, as considered later in this chapter, accounting practices that precluded an
accurate assessment of the state of contracts.
14. Carillion’s business model was an unsustainable dash for cash. The mystery is
not that it collapsed, but how it kept going for so long. Carillion’s acquisitions lacked
a coherent strategy beyond removing competitors from the market, yet failed to
generate higher margins. Purchases were funded through rising debt and stored up
pensions problems for the future. Similarly, expansions into overseas markets were
driven by optimism rather than any strategic expertise. Carillion’s directors blamed a
few rogue contracts in alien business environments, such as with Msheireb Properties
in Qatar, for the company’s demise. But if they had had their way, they would have won
13 contracts in that country. The truth is that, in acquisitions, debt and international
expansion, Carillion became increasingly reckless in the pursuit of growth. In doing
so, it had scant regard for long-term sustainability or the impact on employees,
pensioners and suppliers.
Dividends
15. Carillion’s final annual report, Making tomorrow a better place, published in March
2017, noted proudly “the board has increased the dividend in each of the 16 years since
the formation of the Company in 1999”.81 This progressive dividend policy was intended
to “increase the full-year dividend broadly in line with the growth in underlying earnings
per share”.82 The board, most of whom were shareholders themselves,83 were expected to
take into account factors including:
• the level of available distributable reserves;
• future cash commitments and investment needs to sustain the long-term growth
prospects of the business; and
• net profits, to provide “dividend cover”,
when determining dividend payments.84

79 Carillion plc, Meeting of the Board of Directors, 7 June 2017 (not published)
80 As above.
83 In the Annual Report and Accounts 2016, p 71, Philip Green, Richard Howson, Zafar Khan, Richard Adam,
Andrew Dougal and Alison Horner are listed as shareholders. Keith Cochrane and Ceri Powell are not.
Carillion 17
16. In reality, Carillion’s dividend payments bore little relation to its volatile corporate
performance. In the years preceding its collapse, Carillion’s profits did not grow at a steady
rate, and its cash from operations varied significantly. In 2012 and 2013, the company had
an overall cash outflow as its construction volumes decreased.85 But in these years the
board decided not only to continue to pay dividends, but to increase them, even though
they did not have the cash-flow to cover them.86
Figure 2: Carillion’s dividend payments
£m
175
150
Profit
125
Cash from
100 operations
75
50 Dividends
25
-25
-50
-75
2011 2012 2013 2014 2015 2016
Source: Carillion plc annual reports and accounts 2011–2016
17. Remarkably, the policy continued right up until dividends were suspended entirely
as part of the July 2017 profit warning.87 The final dividend for 2016, of £55 million, was
paid just one month before on 9 June 2017.88 Former members of Carillion’s board told
us that there was a “wide ranging discussion”89 and “lengthy debate” in January and
February 2017 on whether to confirm that dividend.90 January 2017 board minutes show
that Zafar Khan, then Finance Director, proposed withholding it to conserve cash and
reduce debt. However, he faced opposition from Andrew Dougal, the Chair of the audit
committee,91 and Keith Cochrane, then the Senior Independent Non-Executive Director
and later interim Chief Executive. Both men expressed concerns about the message
holding dividends would have sent to the market. Mr Cochrane suggested “it may be
appropriate to send a message to the market about debt reduction at the right time”.92 He
85 Q603 [Richard Adam]

87 Carillion plc, H1 2017 Trading Update, 10 July 2017
88 This payment was the final dividend payment for 2016, announced in May and paid on 9 June 2017. Stockopedia,
Carillion, accessed 1 May 2018
90 Q292 [Zafar Khan]
91 Mr Dougal held 5,000 shares in the company. Carillion plc, Annual Report and Accounts 2016, p 71
92 Carillion plc, Minutes of a meeting of the Board of Directors, 26 January 2017
18 Carillion
told us that “management were committed to reducing average net debt after paying the
dividend”.93 It is clear, however, that all other considerations, including addressing the
company’s ballooning debt burden, were over-ridden. The minutes of the February 2017
board meeting provide no detail of any further discussion of the dividend, but simply
confirm that the board recommended a dividend of 18.45p per share.94 The right time to
“send a message to the market” did not appear to come until the board issued its profit
warning just over four months later.
18. Richard Adam, Finance Director from April 2007 to December 2016, told us that
Carillion’s objective in dividend payments was “balancing the needs of many stakeholders”,
including pensioners, staff and shareholders.95 We saw little evidence of balance when
it came to pensioners’ needs. Over the six years from 2011–2016, the company paid out
£441 million in dividends compared to £246 million in pension scheme deficit recovery
payments.96 Despite dividend payments being nearly twice the value of pension payments,
Keith Cochrane denied that dividends were given priority.97 When offered the analogy of
a mother offering one child twice as much pocket money as the other, he merely noted
that was an “interesting perspective”.98 Richard Adam’s defence was that from 2012–2016,
dividends increased by only 12% whereas pension payments increased by 50%.99 He
omitted to mention that, across his ten year stint as Finance Director, deficit recovery
payments increased by 1% whereas dividends increased by 199%.100 Setting aside selective
choosing of dates, there is a simpler point: funding pension schemes is an obligation.101
Paying out dividends is not. We are pleased that the Business Secretary has confirmed
that his Department’s review into insolvency and corporate governance will include
considering “whether companies ought to provide for company pension liabilities, before
distributing profits” through dividends.102
19. Nor was it clear that shareholders agreed that Carillion achieved Richard Adam’s
balance. Some investors, such as BlackRock, invested passively in Carillion because it was
included in tracking indices. For them, the suspension of dividends, as with significant
falls in the share prices, could lead to a company being removed from indices and trigger
an automatic obligation to sell shares.103 Active investors took a more nuanced view.
Standard Life Aberdeen told us that while “the dividend payment is an important part
of the return to shareholders from the earnings” it was not in the investor’s interests to
encourage the payment of “unsustainable dividends.”104 In December 2015, Standard Life
Investments (as it then was) took the decision to begin divesting from Carillion in part
because they realised Carillion’s insistence on high dividends meant it was neglecting

94 Carillion plc, Minutes of a meeting of the Board of Directors, 28 February 2017
96 Analysis of Carillion plc’s Annual Report and Accounts cashflow statements 2011–2016
100 Analysis of Carillion plc’s annual report and accounts cashflow statements 2007–2016
101 Pensions are deferred pay and pension deficits are responsibilities of the employer. See TPR, Annual funding
statement for defined benefit pension scheme, April 2018, p 11.
102 Letter from the Secretary of State for Business, Energy and Industrial Strategy to the Chairs, 30 April 2018
103 Letter from BlackRock to the Chairs, 8 February 2018, Q1118 [Amra Balic]
104 Q1115 [Euan Stirling]
Carillion 19
rising debt levels.105 Murdo Murchison, Chief Executive of Kiltearn Partners, another
active investor, said dividend payments that were “not sustainable” was a factor in his
company choosing to divest Carillion shares:
In our analysis we baked in a dividend cut. When the market is telling you a
dividend is not sustainable the market is usually right and, again, it is quite
interesting in this context as to why the management were so optimistic
about the business they were prepared to take a different view.106
Ultimately, any investors who held on to their shares found them worthless.
20. Mr Murchison said that, while dividends should be “a residual”, payable once liabilities
had been met, there was a problem with “corporate cultures where a lot of management
teams believe dividends are their priority”.107 Carillion’s board was a classic such case,
showing:
desire to present to investors a company that was very cash generative and
capable of paying out high sustainable dividends. They took a lot of pride in
their dividend paying track record.108
Such an approach was inconsistent with the long-term sustainability of the company.
21. The perception of Carillion as a healthy and successful company was in no small
part due to its directors’ determination to increase the dividend paid each year,
come what may. Amid a jutting mountain range of volatile financial performance
charts, dividend payments stand out as a generous, reliable and steady incline. In
the company’s final years, directors rewarded themselves and other shareholders by
choosing to pay out more in dividends than the company generated in cash, despite
increased borrowing, low levels of investment and a growing pension deficit. Active
investors have expressed surprise and disappointment that Carillion’s directors chose
short-term gains over the long-term sustainability of the company. We too can find no
justification for this reckless approach.
Pension schemes
Pension obligations
22. Carillion operated two main defined benefit (DB) pension schemes for its employees,
the Carillion Staff and Carillion ‘B’ schemes.109 In April 2009, Carillion closed the schemes
to further accruals and from that point employees could instead join a defined contribution
plan.110 Carillion still retained its obligation to honour DB pension entitlements
accumulated before that date. The schemes had combined deficits, the difference between
their assets and liabilities, of £48 million in 2008, £165 million in 2011 and £86 million in
2013.111
105 Letter from Standard Life to the Chairs, 2 February 2018

106 Q1116 [Murdo Murchison]
108 As above.
109 The Carillion ‘B’ scheme was only available to executive directors and other senior employees.
111 Analysis of scheme annual report and accounts.
20 Carillion
23. Those deficits, while undesirable, were not unusually high by DB standards and may
well have been manageable. Through its acquisitions policy, however, Carillion took on
responsibility for several additional DB schemes in deficit. When the company entered
liquidation in 2018, it had responsibility for funding 13 UK DB pension schemes.112 All but
two of those are likely to enter the Pension Protection Fund (PPF), which pays reduced
benefits to members of schemes that are unable to meet pension promises owing to the
insolvency of the sponsoring employer.113 The PPF, which is part-funded by a levy on other
pension schemes, will take on responsibility for both the assets of the schemes and the
liability of paying the reduced pensions. The PPF estimates the aggregate deficit for PPF
purposes will be around £800 million, making it the largest ever hit on its resources.114
Box 1: The Pension Protection Fund (PPF)
The PPF protects the pensions of members of DB pension schemes. If the sponsoring
employer of a scheme becomes insolvent, and the schemes cannot afford to pay
pensions at least equal to PPF compensation, the PPF compensates them financially
for the money they have lost. PPF benefits are generally lower than in the failed
scheme: if someone had already reached pension age when the company went bust,
they would be paid their full pension, but will usually have lower annual indexation.
Schemes members yet to reach pension age face a 10% haircut to their pensions as
well. There is also a cap on annual compensation.
As well as taking on liabilities for paying reduced pensions, the PPF takes on the
assets of the failed schemes. To fund pension payments, it invests those assets, seeks
to recover money and other assets from the insolvent sponsors, and charges a levy on
pension schemes eligible for the PPF. The levy is risk-based and acts as an insurance
premium. In March 2017, the schemes insured by the PPF had a combined deficit on
a PPF basis of £295 billion.
In 2018–19, the PPF expects to collect £550 million of levy in total across all eligible
schemes. The hit from the Carillion schemes will be larger than that. However, the
PPF has a reserve of £6.1 billion, making it “well-placed” to absorb the Carillion
schemes. The PPF projects a 93% probability of being fully-funded by 2030.115
24. The most significant of the additional schemes acquired were sponsored by Mowlem
and Alfred McAlpine. Mowlem was purchased in 2006, when it had a year-end pension
deficit of £33 million.116 Alfred McAlpine was purchased in 2008, when it had a year-end
deficit of £123 million.117 By the end of 2011, the combined deficit on these two schemes had
grown to £424 million.118 On 6 April 2011, a single trustee board, Carillion (DB) Pension
Trustee Ltd, was formed to act for the two main Carillion schemes, Alfred McAlpine,
112 Carillion Group Section; Permarock Products Pension Scheme; Carillion “B” Pension Scheme; The Carillion Staff
Pension Scheme; Alfred McAlpine Pension Plan; Mowlem Staff Pension and Life Assurance Scheme; Planned
Maintenance Engineering Limited Staff Pension And Assurance Scheme; Bower Group Retirement Benefits
Scheme; The Carillion Public Sector Scheme; The Mowlem (1993) Pension Scheme; Prudential Platinum Carillion
Integrated Services Limited Section; Carillion Rail (Centrac) Section; Carillion Rail (GTRM) Section. Carillion also
had DB pension obligations in Canada following acquisitions there.
113 Letter from PPF to the Chair, 20 February 2018
114 Letter from PPF to the Chair, 3 April 2018
115 Letter from PPF to Chairs, 20 February 2018 and PPF Annual Report and Accounts 2016–17
116 Mowlem Staff Pension and Life Assurance Scheme, Report and financial accounts 2007, p 8
117 Alfred McAlpine Pension Plan, Actuarial Valuation as at 31 December 2008, p 2
2013, p 3
Carillion 21
Mowlem and two additional schemes: Bower and the Planned Maintenance Engineering
Staff schemes.119 These schemes together accounted for the large majority of both the
total Carillion deficit and total pension membership.120 We focus in this report on those
schemes and the negotiations between Carillion and Carillion (DB) Pension Trustee Ltd
(the Trustee).
Scheme funding
25. DB pension schemes are subject to a statutory funding objective of having sufficient
and appropriate assets to make provision for their liabilities.121 Actuarial valuations must
be carried out at least once every three years to assess whether this statutory funding
objective is met.122 If it is not, the Trustee and sponsor company are required to agree a
recovery plan for how and when the scheme will be returned to full funding, including
deficit recovery payments to be made by the sponsor.123 The agreed valuation and recovery
plan, schedule of contributions and valuation must be submitted to The Pensions Regulator
(TPR) within 15 months of the valuation.124
26. The main Carillion schemes had combined deficits of:
• £327 million on 31 December 2008;
• £617 million on 31 December 2011; and
• £439 million on 31 December 2013.125
27. Carillion and the Trustee therefore needed to agree three recovery plans over the
past decade. The 31 December 2016 valuation was, Keith Cochrane told us, “somewhat
overtaken by events”126 as the company unravelled, but the Trustee expected the total
deficit to be around £990 million.127
28. The 2008 valuation was a warning of things to come. Carillion and the Trustee
failed to agree a valuation within 15 months, mainly because of a disagreement over the
assumptions used to calculate the deficit. Carillion pushed for more optimistic assumptions
of future investment returns than the Trustee considered prudent.128 Additionally, while
the Trustee believed that contributions of £35 million per annum were both necessary
and affordable as a minimum, Carillion said they could not afford contributions above
£23 million.129 Carillion also wanted the recovery plan to be 15 years, which the Trustee
noted “exceeds the 10 year maximum which the Regulator suggests is appropriate”.130 The
119 Letter from Carillion (DB) Pension Trustee Ltd to the Chair, 26 January 2018
120 Trustee data shows that at the end of 2013, total membership across these schemes was 20,587. Carillion plc
Annual Report and Accounts 2013 show that total membership across all schemes was 28,785 at the end of 2013.
121 Pensions Act 2004, section 222
124 The Pensions Regulator, Code of practice no.3 Funding defined benefits, July 2014, p44
125 Analysis of scheme valuation reports. The Bower pension scheme operated on a different valuation cycle and is
therefore not included here.
127 Letter from Carillion (DB) Trustee Limited to the Chair, 26 January 2018
128 Letter from Robin Herzberg to the Pensions Regulator, 25 March 2010
129 As above.
130 As above.
22 Carillion
valuation and recovery plans were eventually agreed in October 2010, seven months late,
with payments averaging £26 million over a 16 year period.131 The company largely got
its way.
29. The 2011 valuation reached an impasse on the same issues:
• The Trustee calculated the deficit at £770 million and requested annual deficit
recovery payments of £65 million for 14 years to address it.132
• Carillion, using more optimistic assumptions, said the deficit was £620 million.
They presented annual deficit recovery contributions of £33.4 million for 15
years as a take it or leave it offer.133
30. The Trustee’s position was supported by independent covenant advice from their
advisors, Gazelle Corporate Finance. Based on the financial reports available to it,
Gazelle said Carillion could increase annual contributions to above £64 million without
a significant impact on available cashflow.134 It also noted Carillion had “historically
prioritised other demands on capital ahead of deficit reduction in order to grow earnings
and support the share price”.135 Despite the continued increases in dividends every year,
the company had refused requests from the Trustee to establish a formal link between the
level of dividends and pension contributions.136
31. Richard Adam, as Finance Director, argued the company could not afford such high
contributions. Gazelle was sceptical of this: his pessimistic corporate projections presented
to the Trustee were certainly at odds with the upbeat assessments offered to the City to
attract investment.137 In retrospect, the gloomy outlook may have been more accurate. But
if that was so, Carillion should not have been paying such generous dividends. Gazelle
concluded that Richard Adam had an “aversion to pension scheme deficit repair funding”.138
The scheme actuary, Edwin Topper from Mercer, said Carillion’s “primary objective was
to minimise the cash payments to the schemes”.139 Robin Ellison, Chair of the Trustee,
observed at the time that Richard Adam viewed funding pension schemes as a “waste of
money”.140
32. Despite TPR writing to both sides in June 2013 to indicate contributions in the range
of £33 million - £39 million would not be “acceptable based on the evidence we have
seen” - Carillion refused to increase its offer.141 In early 2014, however, a compromise was
reached based on a new valuation date of 31 January 2013. Improved market conditions
between those two dates had reduced the deficit to £605 million. The Trustee reluctantly
131 The recovery plans across the five different schemes were all 16 years in length, with the exception of Alfred
McAlpine, which was 14 years in length. The Alfred McAlpine Pension Plan Annual report for the year ended 31
December 2010, p 28
132 Letter from the Trustee to the Pensions Regulator, 9 April 2013
133 As above.
134 Letter from Gazelle Director to Carillion Trustees, 23 February 2012
135 As above.
136 Carillion single Trustee - meeting between Trustee representatives and the Pensions Regulator regarding failure
to agree the 2011 valuation, 29 April 2013
137 Letter from the Trustee to the Pensions Regulator, 9 April 2013
138 Letter from Simon Willes, Gazelle Executive Chairman, to the Chair, 29 March 2018
139 Mercer, Meeting note with Carillion single trustee schemes and TPR, 19 December 2012
140 Sacker and Partners LLP, Carillion single Trustee - meeting between Trustee representatives and the Pensions
Regulator regarding failure to agree the 2011 valuation, 29 April 2013
141 Letter from TPR to Robin Ellison and Janet Dawson, 27 June 2013
Carillion 23
accepted initial annual contributions of £33 million, in line with Carillion’s original offer
and £30 million less than the Trustee originally requested. While recovery contributions
were scheduled to rise to £42 million from 2022, there would be new negotiations in the
meantime.142 The Carillion group would also only guarantee payments due up to end of
2017.143 Beyond then, schemes would only have recourse to individual sponsor companies
within the group. It was also agreed that the next valuation, based on the position at 31
December 2013, would be based on the same assumptions and would not consider the
total level of contributions.144 It is difficult to interpret this result as anything other than
a victory for Carillion in its objective of minimising its contributions to the scheme. We
consider the role of TPR in this outcome later in this report.
33. Following the July 2017 profit warning, Carillion was desperate to cut costs. The
pension schemes were one of their main targets. The Trustee agreed to defer pension
contributions worth £25.3 million due between September 2017 and April 2018, on the
basis that the sponsor would otherwise have been insolvent.145 Carillion also sought to
offload its pension schemes into the PPF in a bespoke deal, though it had far from sufficient
funding to produce a proposal that would have been attractive to the Trustee, TPR or the
PPF.146
34. Though most of them were shareholders, Carillion’s former directors were not members
of the DB pension schemes. Instead, they received generous employer contributions to a
defined contribution scheme. For example, Richard Howson and Richard Adam received
employer contributions of £231,000 and £163,000 respectively for their work in 2016.147 The
performance indicators used to determine bonus payments did not include managing
the risk of pension deficits. The directors rejected accusations, however, that they did
not care about funding the pension schemes. They repeatedly referred to meeting their
pension obligations, meaning fulfilling the deficit recovery plan, without any regard to
the lopsided negotiation that led to its agreement.148 The company ultimately reneged on
that agreement, asking the Trustee to forgo payments due in a desperate effort to save the
company. Fundamentally, those directors did not meet their obligations. TPR makes clear
that “pensions are deferred pay and pension deficits are responsibilities of the employer”.149
Carillion failed in its obligations to honour its pension promises and to take adequate
steps to address its pension deficits.
35. Honouring pension obligations over decades to come was of little interest to a
myopic board who thought of little beyond their next market statement. Their cash-
chasing acquisitions policy meant they acquired pension scheme deficits alongside
companies. Their proposals for funding those deficits were consistently and resolutely
derisory as they blamed financial constraints unrecognisable from their optimistic
market announcements. Meeting the pension promises they had made to their rank
2013, p 5
143 Gazelle, Carillion plc Paper for the trustee board, 7 February 2012, p 3
2013, p 1. Consequently, there was no great scope for disagreement over this valuation and it was agreed in
December 2014.
145 Letter from Carillion (DB) Trustee Limited to the Chair, 26 January 2018
First witness statement of Keith Robertson Cochrane, Dated: 15 January 2018 (Not published); Q757 [Mike Birch]
147 Carillion plc, 2016 Annual Report and Accounts, p 66
148 For example, Q381, Q384 [Keith Cochrane], Q571 [Philip Green]
149 The Pensions Regulator, Annual funding statement for defined benefit pension scheme, April 2018, p 11
24 Carillion
and file staff was far down their list of priorities. This outlook was epitomised by
Richard Adam who, as Finance Director, considered funding the pension schemes a
“waste of money”.
Suppliers
36. Carillion relied on an extensive network of suppliers to deliver materials, services

and support across its work.150 At the point of the company’s collapse, the construction
trade body Build UK estimated that Carillion’s supply chain spanned 30,000 companies.151
These businesses included direct subcontractors, indirect subcontractors, and suppliers
who may have been unaware that they formed part of Carillion’s supply chain until the
insolvency prevented them from receiving payments owed. The Federation of Small
Business (FSB) said that small suppliers had been placed in a “perilous” situation.152 The
jeopardy suppliers faced at the hands of Carillion was not, however, limited to the point
when the company ceased trading. We heard that the company had long been abusing
its dominant market position by making small suppliers wait for payment.153 Suppliers
told us that Carillion subjected them to extended delays across reporting periods and was
notable for quibbling with invoices to avoid prompt payment.154
37. Carillion signed the Government’s Prompt Payment Code in 2013.155 Signatories are
expected to pay suppliers on time, give clear guidance to suppliers and encourage good
practice. They should pay 95% of invoices within 60 days unless there are exceptional
circumstances,156 undertake to work towards 30 day payment terms, and avoid practices
that adversely affect the supply chain.157
38. Despite signing the Code, Carillion had a reputation as a notorious late payer.158 In
2016, the FSB protested to the company on behalf of suppliers waiting up to 126 days to
receive the payments they were owed.159 The Rt Hon Greg Clark MP, Secretary of State
for Business, Energy and Industrial Strategy, said that “it is obvious that those payment
terms were too long”.160 Carillion’s former directors were, however, either unaware of the
use of this business practice, or unwilling to admit to it. Richard Adam, Richard Howson
and Philip Green all claimed not to recognise cases of people waiting 120 to 126 days for
payment.161 Emma Mercer, Carillion’s final Finance Director, told us of “a few outliers”
of “about five per cent” of the supply chain were paid over 120 days and “less than ten per
cent” waited 60 days.162
150 The Construction Index, Top 100 construction companies 2017, accessed 22 April 2018
151 BuildUK, Mitigating Impact of Carillion’s Liquidation, accessed 22 April 2018
152 Letter from FSB to the Chairs, 31 January 2018
154 Letter from Vaughan Engineering Ltd to the Chair, 30 March 2018; we also received confidential information
from other Carillion suppliers on payment delays.
156 The Government and Chartered Institute of Credit Management do not set criteria for exceptional circumstance,
but suggest the example of instances where a company is able to demonstrate that they apply different terms
to the benefit of their smaller suppliers.
157 Department for Business, Energy and Industrial Strategy and Chartered Institute of Credit Management, Prompt
Payment Code, accessed 24 April 2018
159 As above.
160 Q1236 [Greg Clark]
161 Q546 [Richard Howson]; Q547 [Richard Adam]; Q548 [Philip Green]
162 Qq356–8 [Emma Mercer]
Carillion 25
39. Emma Mercer’s evidence exhibited greater frankness than Carillion’s other former
directors. While she accepted that suppliers were asked to sign up to 120 day payment
terms, she explained that the company offered an early payment facility (EPF) option.163
She called this practice “supply chain factoring”, which is also known as “reverse factoring”
or “supply chain financing”. In such an arrangement, suppliers can receive payments from
a bank ahead of standard timescales, at a discounted rate. Supply chain financing has won
support from industry bodies, including the FSB, and Government. In 2012, the then
Prime Minister announced the Supply Chain Finance Scheme as an “innovative way for
large companies to help their supply chain access credit, improve cash-flow and at a much
lower cost”.164 Carillion was a founding participant in this well-intentioned initiative.
40. Carillion’s use of supply chain finance was unusual in both the harshness of the
alternative standard payment terms and the extent to which the company relied on it.
Shortly after the launch of the Supply Chain Finance Scheme, Carillion changed its
standard payment terms to 120 days.165 Suppliers could sell their invoices at a discount to
Carillion’s bank to receive their payment after 45 days. Carillion, however, would not be
expected to reimburse the bank until the standard payment terms had expired, providing
them with a generous repayment period. Emma Mercer told us that this was a deliberate
strategy: Carillion explicitly used its EPF to avoid “damaging our working capital” and
because it was vulnerable to its own customers not paying within 45 days.166 This only
serves to highlight the fragility of Carillion’s business model.
Box 2: Vaughan Engineering
The collapse of Carillion will inevitably have a ripple effect through the UK
construction industry and the wider economy. One of the first companies to be hit
was Vaughan Engineering Ltd, which filed for administration on 28 March 2018.167
The company employed around 200 people and provided mechanical and electrical
building services on large commercial building projects. They had worked extensively
with Carillion over the past decade.168
Vaughan Engineering described Carillion’s collapse as the principal factor in their

own downfall, though they also cited contract disputes with other contractors and
inadequate Government support following Carillion’s insolvency.169 Their complaints
against Carillion echo those of other suppliers who had to deal with them: standard
payment terms of 120 days that could only be circumvented by use of the early
payment facility, delays in the certification of payments and unsubstantiated counter
claims. The company believe they were owed £830,000 by Carillion, which left them
unable to cover their liabilities.170
41. At the point the company collapsed, Carillion had access to credit of up to £500
million for the “early” payment of suppliers, and was drawing around £350 million.171 That
Carillion was using supply chain financing to prop itself up would be of grave concern to
164 ‘Prime Minister announces Supply Chain Finance Scheme‘ Prime Minister’s Office, 23 October 2012
165 Carillion was still expected to pay within 30 days on its public sector contracts.
167 BBC News, Former Carillion sub-contractor in administration, accessed 27 April 2018
168 Letter from Vaughan Engineering Ltd to the Chair, 30 March 2018
169 As above.
170 As above.
171 Carillion plc, Group short term cash flow forecast, 22 December 2017 (not published)
26 Carillion
investors. But S&P Global, a credit ratings agency, told us that “the lack of transparency
concerning Carillion’s reverse factoring practices likely obscured its weak balance sheet
and cash flow position.”172 The accounting impact of this approach is considered later
in this report. In the dying days of the company, Carillion considered a proposal by
its restructuring consultants, EY, to extend standard payment terms to 126 days as an
untapped “cash generative opportunity”.173
42. Carillion relied on its suppliers to provide materials, services and support across
its contracts, but treated them with contempt. Late payments, the routine quibbling of
invoices, and extended delays across reporting periods were company policy. Carillion
was a signatory of the Government’s Prompt Payment Code, but its standard payment
terms were an extraordinary 120 days. Suppliers could be paid in 45 days, but had to
take a cut for the privilege. This arrangement opened a line of credit for Carillion,
which it used systematically to shore up its fragile balance sheet, without a care for the
balance sheets of its suppliers.
43. We welcome that as part of Carillion’s insolvency, the Official Receiver has sought to
improve payment terms for goods and services provided during and for the benefit of the
liquidation. They have reduced terms to “there or thereabouts, within 30 days of invoice
rather than the 120 days that [we] have heard”.174This does not, however, benefit those
suppliers who remain unpaid for goods and services before the collapse of the company.
The vast majority of those were uninsured and have joined the long list of creditors unlikely
to see anything they were owed.175
Corporate governance
44. Corporate governance is the process by which a company is directed and controlled.176
Its purpose is “to facilitate effective, entrepreneurial and prudent management that can
deliver the long-term success of the company”.177 The UK Corporate Governance Code,
held by the Financial Reporting Council (FRC), states that the “underlying principles of
good governance [are] accountability, transparency, probity and a focus on the sustainable
success of an entity over the longer term”.178 Philip Green told us that Carillion’s board
upheld these standards, describing a culture of “honesty, openness, transparency and
challenging management robustly, but in a supportive way”.179
45. The documents we saw, however, showed a very different picture:
• A June 2017 lessons learned exercise following an accounting review found

the need for a “cultural audit” and “review of values”, which should make
changes “where necessary such that staff fully understand that behaving with
transparency, honest[y] and integrity is as important as achieving, improving
and delivering”.180
172 Letter from S&P Global to the Chairs, 23 March 2018

173 Carillion plc, Weekly reporting pack for week ending 26 November Actuals, 8 December 2017 (not published)
174 Q1380 [David Kelly]
175 “Most UK suppliers uninsured against Carillion’s collapse”, Daily Telegraph, 25 January 2018
176 Institute of Chartered Accountants of England and Wales, What Is Corporate Governance?, accessed 1 May 2018
177 Financial Reporting Council, UK Corporate Governance Code, para 1
178 As above, para 4
179 Q418 [Philip Green]
180 Carillion plc, Lessons Learned Board Pack, June 2017, p 66
Carillion 27
• EY, appointed on 14 July to support a strategic review of the company, quickly

identified a “lack of accountability […] professionalisation and expertise”, an
“inward looking culture” and a “culture of non-compliance”.181
• Minutes from a Carillion board discussion of strategy in August 2017 identify

“a culture of making the numbers” (hitting targets at all costs) and “wilful
blindness” among long-serving staff as to what was occurring in the business.
The board concluded that the culture of the organisation required “radical
change”.182
• Carillion’s January 2018 turnaround business plan stated that the group had
“become too complex with an overly short-term focus, weak operational risk
management and too many distractions outside of our ‘core’”.183
46. Carillion’s management lacked basic financial information to do their job. A January
2018 review by FTI Consulting for Carillion’s lenders found the “presentation and
availability of robust historical financial information”, such as cash flows and profitability,
to be “extremely weak”.184 This accorded with a presentation by Keith Cochrane to the
board on 22 August 2017 which identified “continued challenges in quality, accessibility
and integrity of data, particularly profitability at contract level”.185 For a major contracting
company, these are damning failings.
47. Such problems were not restricted to financial information. When it collapsed in
January 2018, the total group structure consisted of 326 companies, 199 based in the
UK,186 of which 27 are now in compulsory liquidation.187 Sarah Albon, Chief Executive
of the Insolvency Service, told us that the company’s “incredibly poor standards” made
it difficult to identify information that should have been “absolutely, straightforwardly
available”, such as a list of directors.188 Responsibility for ensuring the company is run
professionally is the responsibility of the board. Stephen Haddrill, Chief Executive of
the FRC, said “there must be enormous cause for concern about how the company was
governed”.189
48. Corporate culture does not emerge overnight. The chronic lack of accountability
and professionalism now evident in Carillion’s governance were failures years in the
making. The board was either negligently ignorant of the rotten culture at Carillion
or complicit in it.
Key board figures
49. Carillion was governed by a seven-member board, comprising the company’s Chief
Executive, Finance Director and five non-executive directors.190 Immediately prior to
the company’s profit warning in July 2017, the members were Richard Howson (Chief
181 Carillion plc, EY presentation to Board, 22 August 2017

182 Carillion plc, Minutes of a meeting of the Board of Directors, 22 August 2017
183 Carillion plc , Group Business Plan, January 2018, p 6
184 Carillion plc, FTI Consulting, Independent Business Review, Januaury 2018
185 Carillion plc, Strategy Proposition Board Presentation, 22 August 2017
186 Q17 [Sarah Albon]
187 PwC, Carillion Group website, accessed 23 April 2018
189 Q17 [Stephen Haddrill]
190 Carillion plc, 2016 Annual Report and Accounts, pp 50–51
28 Carillion
Executive), Zafar Khan (Finance Director), Philip Green (non-executive Chairman), and
Keith Cochrane, Andrew Dougal, Alison Horner and Baroness Morgan of Huyton as
non-executive directors. By the collapse of the company Mr Howson and Mr Khan were
no longer in post, replaced by Keith Cochrane and Emma Mercer respectively.191 Over the
course of the inquiry, we have sought evidence from and about Carillion’s board and their
central role in the collapse of the company.
Richard Howson
50. Richard Howson joined the Carillion board in December 2009 and was Chief
Executive from 1 January 2012 until his sacking as the company issued its profit warning
on 10 July 2017. He stayed on in a lesser role before leaving in September 2017, though he
continued to receive his full, contractual salary until the company entered liquidation.192
Mr Howson had been at the company since its formation in 1999, and the 2016 annual
report highlighted his “detailed knowledge of key business units”.193 In evidence to us,
however, he sought to distance himself from problems in the company that were “from
the long term and from a long time ago”.194 He joined the board after the acquisitions of
Mowlem and Alfred McAlpine (but before Eaga) and stressed that he had moved from
a role responsible for Middle East construction when Carillion signed its contract with
Msheireb.195
51. Mr Howson demonstrated little grasp of the unsustainability of Carillion’s business

model or the basic failings of governance that lay at the root of its problems. He opened
his evidence by stating that “but for a few very challenging contracts, predominantly in
the Oman and one in Qatar, I believe Carillion would have survived”.196 He even seemed
surprised to have been removed as Chief Executive following the profit warning, arguing
“the business was in a sustainable position” based on support it was receiving from banks.197
In his world, Carillion was a healthy business that fell victim to a series of unforeseeable
events over which it had no control.
52. In fact, Mr Howson had a responsibility to ensure he was well informed about
performance and risk, and to act on areas of weakness. Rather than make the fundamental
changes needed, however, he spent much of his time chasing down the consequences of
the company’s mistakes. As Chief Executive, he told us “probably 60% of my time was
either on cash calls or, a lot of time, out and about around contracts collecting”.198 He said
he “felt like a bailiff” as he visited Qatar ten times a year for six years, “just to try to collect
cash” from a single contract.199 He was retained after his sacking with responsibilities for
collecting cash on key contracts and boosting morale in the UK construction business.200
We do not doubt that Mr Howson could be an effective cheerleader: he clearly had great

192 Carillion plc, Remuneration Committee Minutes, 7 September 2017
193 Carillion plc, Annual Report and Accounts 2016, pp 50–51; Carillion plc, Annual Report and Accounts 2016, p 50
Carillion 29
affection for what he told us was “a great business”.201 However, as the leader of the
company, he was either unaware of the significant, long-term problems it was facing, or
chose not to act on them.
53. Richard Howson, Carillion’s Chief Executive from 2012 until July 2017, was the
figurehead for a business model that was doomed to fail. As the leader of the company,
he may have been confident of his abilities and of the success of the company, but under
him it careered progressively out of control. His misguided self-assurance obscured an
apparent lack of interest in, or understanding of, essential detail, or any recognition
that Carillion was a business crying out for challenge and reform. Right to the end, he
remained confident that he could have saved the company had the board not finally
decided to remove him. Instead, Mr Howson should accept that, as the longstanding
leader who took Carillion to the brink, he was part of the problem rather than part of
the solution.
Keith Cochrane
54. Keith Cochrane was appointed to the Carillion board as Senior Independent
Non-Executive Director (NED) on 2 July 2016.202 He came with extensive board-level
experience, yet quickly succumbed to the dysfunctionality prevalent on the board.203 He,
and the board, were aware of concerns from shareholders about the company’s net debt
and its pensions deficit. The board minutes, however, show little sign of these positions
being properly challenged and there was no general change of approach until the profit
warning.204 Mr Cochrane said that he sought to challenge executives, “in an appropriate
manner”,205 but also believed there was “no basis” in 2016 for “not accepting the view that
management put forward”.206 In evidence to us, Mr Cochrane asked himself “should the
board have been asking further, more probing questions?” but, even aware of the fate of
the company and with hindsight, he could only respond “perhaps.”207
55. When Richard Howson was sacked as Chief Executive in July 2017, the board on
which Mr Cochrane already served asked him to step into the role on an interim basis. He
began to recognise some problems the company faced, extending the size of the provision
made in the profit warning, and admitting—to the board at least—that the company had
cultural problems. Mr Cochrane told us that Carillion was “a business worth fighting for”,208
but in giving investors “limited and vague” answers to “fairly fundamental questions”
about the company, he reinforced their concerns and contributed to a continued sell-off of
shares.209 In October 2017, Carillion appointed a permanent successor as Chief Executive
from outside the company. His start date was brought forward to 22 January 2018 “to
ensure the long-term sustainability of UK industry”. By then, the company was already in
liquidation.210
203 Carillion plc, Annual Report and Accounts 2016, p 50. He held executive roles at The Weir Group, Stagecoach plc
and Scottish Power plc, and continued to be lead non-executive director for the Scotland Office and Office of
the Advocate General.
204 Qq229 – 237 [Keith Cochrane]; Carillion plc, Minutes of a meeting of the Board of Directors, 26 January 2017
208 Letter from Kiltearn Partners to the Chairs, 2 February 2018
209 As above.
210 “Carillion brings start date forward for new CEO”, Financial Times, 20 December 2017
30 Carillion
56. Keith Cochrane was an inside appointment as interim Chief Executive, having
served as a non-executive on the board that exhibited little challenge or insight. He
was unable to convince investors of his ability to lead and rebuild the company. Action
to appoint new leadership from outside Carillion came far too late to have any chance
of saving the company.
Non-executive directors
57. Carillion’s five NEDs had the same legal duties, responsibilities and potential liabilities
under the Companies Act 2006 as their executive counterparts.211 The distinction is that
NEDs are responsible for constructively challenging the executives responsible for the
day-to-day running of a company, and develop proposals for strategy. The Corporate
Governance Code states:
Non-executive directors should scrutinise the performance of management

in meeting agreed goals and objectives and monitor the reporting of
performance. They should satisfy themselves on the integrity of financial
information and that financial controls and systems of risk management
are robust and defensible.212
58. The Carillion NEDs who gave evidence to us told us they performed well in this role.
Alison Horner, a NED from December 2013 until the company’s collapse, said “we were
there to provide oversight and challenge, and we were able to do that effectively”.213 Philip
Green, a NED since June 2011 and non-executive Chairman since May 2014, agreed, saying
“we challenged; we probed; we asked”.214 When we asked him for a concrete example of
this challenge, he cited the company’s level of debt in 2016 and 2017, stating “the board
consistently challenged management on debt, and management then developed a so-called
self-help plan to reduce debt”.215 Yet debt rose from £689 million to £961 million over that
period.216 Mr Green also pointed to board scrutiny of how executives were managing
large, failing contracts:
Some people challenged by sending questions in advance by email; some

people challenged in the meeting. I would say that it was a board that
constructively challenged management.217
However, Mr Green later cited those same contracts as a “very significant factor” in
the company’s collapse.218 Murdo Murchison, of former Carillion shareholder Kiltearn
Partners, doubted whether the non-executive directors had been able “to exercise any
effective check on the executive management team. It appears that they were hoodwinked
as much as anybody else”.219
211 The five NEDs in place at the end of 2016 were: Philip Green, Andrew Dougal, Alison Horner, Ceri Powell and
Keith Cochrane. As Chairman, Philip Green was paid £215,000 per year. All the others were paid £61,000.
Carillion plc, Annual Report and Accounts 2016, p 66
212 Financial Reporting Council, UK Corporate Governance Code, para A.4
213 Q417 [Alison Horner]
Carillion 31
59. Non-executives are there to scrutinise executive management. They have a

particularly vital role in challenging risk management and strategy and should act
as a bulwark against reckless executives. Carillion’s NEDs were, however, unable to
provide any remotely convincing evidence of their effective impact.
Philip Green
60. Philip Green joined the Carillion board as Senior Independent NED in June 2011 and
became Chairman in May 2014. He was an experienced member of corporate boards.220
He also had experience of failing companies: he was Managing Director of Coloroll before
it went into receivership in June 1990, following which, in 1994, the Pensions Ombudsman
made a finding of breach of trust and maladministration against him.221 In 2011 he was
appointed as a corporate responsibility adviser to the then Prime Minister, a role he left
in 2016.222
61. The UK Corporate Governance Code says that a company’s Chairman is “responsible
for leadership of the board and ensuring its effectiveness on all aspects of its role”.223 In
this position, Philip Green oversaw low levels of investment, declining cash flow, rising
debt and a growing pension deficit. Yet his board agreed year-on-year dividend increases
and a rise in remuneration for his executive board colleagues from £1.8 million to £3.0
million.224 Mr Green was still at the helm when the company crashed in January 2018.
62. Mr Green appears to have interpreted his role as Chairman as that of cheerleader-in-
chief. His statement in the 2016 Annual Report and Accounts, signed on 1 March 2017,
just four months before the profit warning, concluded:
Given the size and quality of our order book and pipeline of contract
opportunities, our customer-focused culture and integrated business model,
we have a good platform from which to develop the business in 2017.225
Even more remarkably, on Wednesday 5 July 2017, a few days before the Monday 10 July
profit warning, Carillion board minutes recorded:
In conclusion, the Chairman noted that work continued toward a positive

and upbeat announcement for Monday, focusing on the strength of the
business as a compelling and attractive proposition [ … ]226
The Monday announcement comprised a £845 million write-down. It is difficult to believe

the Chairman of the company was not aware of the seriousness of its position, but equally
difficult to comprehend his assessment if he was.
220 At the time of his appointment as Carillion’s Chairman he was also Chairman of BakerCorp and Chairman
Designate of Williams and Glyn Bank Limited and had previously been Chairman of Clarkson plc.
221 ‘Carillion boss Philip Green has previously been found guilty of a breach of trust over pensions’, City A.M., 16
January 2018
222 City A.M., Carillion chairman Philip Green was a number 10 adviser , City A.M., 15 January 2018
223 Financial Reporting Council, UK Corporate Governance Code, para A.3
224 2014–2016. Executive directors were Richard Howson and Richard Adam. Total remuneration includes salary/
fees, benefits, bonus, long-term incentives and pension.
32 Carillion
63. In his evidence to us, Philip Green accepted, as Chairman, “full and complete”
responsibility for the collapse of the company.227 He clarified, however, that he did “not
necessarily” accept culpability,228 and that it was not for him to say who was culpable.229
His company, however, assigned culpability in sacking Richard Howson, Zafar Khan, and
“several other members of senior management”.230 Subsequent market announcements
and the group’s January 2018 business plan referred optimistically to the “new leadership
team”, a “refreshed” executive team and a “bolstered” board. Indeed, in a letter to the
Cabinet Office on 13 January 2018, Mr Green reassured the Government that “the previous
senior management team have all exited the business”.231 He, however, was to remain at
the head of the proposed new board.232
64. Philip Green was Carillion’s Chairman from 2014 until its liquidation. He
interpreted his role as to be an unquestioning optimist, an outlook he maintained in a
delusional, upbeat assessment of the company’s prospects only days before it began its
public decline. While the company’s senior executives were fired, Mr Green continued
to insist that he was the man to lead a turnaround of the company as head of a “new
leadership team”. Mr Green told us he accepted responsibility for the consequences of
Carillion’s collapse, but that it was not for him to assign culpability. As leader of the
board he was both responsible and culpable.
Remuneration committee
65. Carillion’s board and its remuneration committee (RemCo) attempted to present
its remuneration policy as unremarkable. RemCo Chair, Alison Horner, told us that its
policy was for executive pay to be “mid-table”, the industry median.233 Benchmarking
analysis commissioned from Deloitte by the RemCo in 2015 showed Carillion paid
relatively low total Chief Executive remuneration.234 As a result of this benchmarking,
Richard Howson’s basic salary was increased by 8% in 2015 and 9% in 2016.235 His total
remuneration jumped from what he recalled to us as “something like £1.1 million or
£1.2 million” to £1.5 million in 2016.236 Philip Green was awarded a 10% increase in his
fees as Chairman in 2016, from £193,000 to £215,000, again based on benchmarking.237
Carillion’s wider comparable workforce received just a 2% pay rise in 2016.238
66. Remuneration based on industry medians generates a ratchet effect: by raising

their pay to the median, companies increase the median itself. This method of reward
can also detach pay from the performance of both the individual and the company. The
generous increases paid to Mr Howson, Mr Green and other senior staff in 2015 and

228 As above.
230 High Court of Justice, In the matter of Carillion plc and in the matter of the Insolvency Act 1986, Exhibit KC1:
First Witness Statement of Keith Robertson Cochrane, dated: 15 January 2018 (Not published)
231 Letter from Philip Green to John Manzoni, 13 January 2018
232 Alison Horner, NED and Chair of the Remuneration Committee, was the only other proposed board member
whose appointment pre-dated the July 2017 profit warning.
234 Carillion plc, Review of Current Incentive Plans, 7 October 2015
236 Qq 613–4 [Richard Howson] Qq 613–4 [Alison Howson]
237 Qq 637–8 [Alison Horner]
Carillion 33
2016 came despite declines in the company’s share price.239 Remuneration for Carillion’s
senior leaders included the potential for an annual bonus of up to 100% of basic pay, split
evenly between financial and other objectives.240 In 2016, Mr Howson received a bonus of
£245,000 (37% of his salary) despite meeting none of his financial performance targets.241
Murdo Murchison of Kiltearn Partners described this as a “complete disconnect” between
financial performance and pay. He said the policy gave the board “a great deal of freedom
to pay what they want to pay” to directors who failed to meet “fairly easy” financial targets.242
67. The RemCo told Carillion’s shareholders in December 2016 that it intended to increase
the maximum bonus available to 150% of salary, to “attract and retain Executive Directors
of the calibre required”.243 Investors such as BlackRock protested in private about these
changes,244 and the RemCo was forced to abandon its plans in March 2017.245 Nonetheless,
at Carillion’s 2017 Annual General Meeting, around 20% of investors voted against the
motion to approve the board’s remuneration report. Kiltearn noted the continued growth
of Richard Howson’s pay as a cause.246 In the RemCo and board papers we have seen,
there is no evidence that the sizeable opposition to the remuneration policy prompted any
reassessment of their general approach.
68. This was evidenced by the RemCo’s remarkable decisions at the time crisis publicly
struck the company. Amra Balic, Managing Director at BlackRock, told us that, at the
time of the 10 July 2017 profit warning, Carillion’s board was “thinking again how to
remunerate executives rather than what was going on with the business”.247 RemCo papers
from 9 July 2017, the day before the first profit warning, show it agreed to offer retention
payments to five senior employees to remain with the company until 30 June 2018, and
salary increases of between 25 and 30% “in the light of the very considerable burden likely
to fall on certain roles”.248 It also took the decision to pay the new interim Chief Executive
(and former member of the RemCo) Keith Cochrane a fee of £750,000 for the role, notably
higher than his predecessor’s basic pay.249
69. An effective board remuneration policy should have the long-term success of the
company as its only goal. Carillion’s RemCo was responsible for a policy of short-term
largesse. In the years leading up to the company’s collapse, Carillion’s remuneration
committee paid substantially higher salaries and bonuses to senior staff while financial
performance declined. It was the opposite of payment by results. Only months before
the company was forced to admit it was in crisis, the RemCo was attempting to
give executives the chance for bigger bonuses, abandoned only after pressure from
institutional investors. As the company collapsed, the RemCo’s priority was salary
boosts and extra payments to senior leaders in the hope they wouldn’t flee the company,

241 As above.
242 Qq1092–3 [Murdo Murchison]
243 Letter from Carillion to BlackRock, 12 December 2016
244 Qq1074–5 [Amra Balic]; Letter from BlackRock to the Chairs, 8 February 2018
245 Letter from Carillion to BlackRock, 7 March 2017
247 Q1076 [Amra Balic]
248 Carillion plc, Remuneration Committee minutes, 9 July 2017. Names and job titles of Carillion employees below
board level have been redacted.
249 Carillion plc, Remuneration Committee minutes, 23 October 2017
34 Carillion
continuing to ensure those at the top of Carillion would suffer less from its collapse
than the workers and other stakeholders to whom they had responsibility. The BEIS
Committee is considering some of these issues as part of its current inquiry into fair pay.250
Clawback
70. In 2014, the Financial Reporting Council’s UK Corporate Governance Code

introduced a requirement for performance-related remuneration policies for executive
directors to include “clawback” provisions. These enable bonuses to be recovered,251 in
circumstances set individually by companies.252 In February 2015, in response to this
change, the Carillion RemCo agreed a policy that enabled clawback if the company’s
accounts needed to be restated, or if the director was guilty of gross misconduct.253 It set
the RemCo as the arbiter of whether, and the extent to which, clawback applied.
71. Following the collapse of Carillion, the company was criticised for having overly
restrictive clawback terms.254 Alison Horner, Chair of the RemCo, denied this accusation
and said the terms made it easier to claw back bonuses.255 Ms Horner also told us that
misstatement and misconduct were used as clawback terms are used by “80% of the
FTSE”.256 However, a sample of clawback terms from 2015 shows that many companies,
including those on which Carillion directors were also board members, also included
“serious reputational damage” as a criteria for clawback.257 It is unclear why Carillion did
not include reputational damage in its terms, and unlikely Ms Horner was unaware of its
use elsewhere, including for executives at Tesco plc, where she is Chief People Officer.258
Furthermore, the RemCo considered new clawback terms recommended by Deloitte,
“to reflect current best practice”, in September 2017 as part of its search for a new Chief
Executive.259 Minutes of that meeting show the RemCo agreed new triggers for clawback,
including reputational damage, failures of risk management, errors in performance
assessments and information, and any other circumstances in which the RemCo believed
to be similar.260
72. These new terms were too late to affect the bonuses given to directors in previous
years, who remained on the weak original terms. In the same meeting as the new terms
were agreed, the RemCo considered asking directors to return their 2016 bonuses, but
concluded “that could not be enforced and would be very difficult to achieve at this
stage”.261 We regret that the RemCo had neither set terms that could have made clawback
possible, nor shown a willingness to challenge directors on their pay-outs. We agree with
250 Business, Energy and Industrial Strategy Committee, Corporate Governance: delivering on fair pay inquiry.
251 Financial Reporting Council, UK Corporate Governance Code, para D1.1. The terms also specify ‘malus’
provisions, which prevent non-cash aspects earned but not yet paid out from vesting.
252 “Bank of England tightens bonus rules”, Financial Times, 13 January 2016
253 Carillion plc, Annual Report and Accounts 2016, p 78; Carillion plc, Remuneration Committee: Clawback, 26
February 2018; Q640 [Alison Horner]. The first provision did not apply if the restatement is due to a change in
accounting standards, policies or practices adopted by the Company
254 “Carillion questions over exec bonuses”, Financial Times, 16 January 2018
255 Qq640–1 [Alison Horner]
257 Wood Group, Annual Report and Accounts 2015, p 50; United Utilities, Annual Report and Accounts 2015, p 89;
Shell, Annual Report and Accounts 2015, p 90
258 Tesco plc, Annual Report and Accounts 2016, p 64
259 Deloitte, Paper for the Remuneration Committee, 7 September 2017, p 1
260 Carillion plc, Remuneration Committee Minutes, 7 September 2017
261 As above.
Carillion 35
the suggestion by Amra Balic of BlackRock to us that standard legal language around
clawbacks applicable to every company would make enforcement more likely.262 Of course,
the Carillion directors could have returned their bonuses voluntarily.
73. Nowhere was the remuneration committee’s lack of challenge more apparent than
in its weak approach to how bonuses could be clawed back in the event of corporate
failures. Not only were the company paying bonuses for poor performance, they made
sure they couldn’t be taken back, feathering the nests of their colleagues on the board.
The clawback terms agreed in 2015 were so narrow they ruled out a penny being returned,
even when the massive failures that led to the £845 million write-down were revealed.
In September 2017, the remuneration committee briefly considered asking directors
to return their bonuses, but in the system they built such a move was unenforceable.
If they were unable to make a legal case, it is deeply regrettable that they did not seek
to make the moral case for their return. There is merit in Government and regulators
considering a minimum standard for bonus clawback for all public companies, to
promote long-term accountability.
Alison Horner
74. Alison Horner presided over those remuneration and clawback policies. She
joined the Carillion board as a NED in December 2013, and was appointed Chair of
the RemCo in May 2014.263 She is also Chief People Officer at Tesco plc, where she has
responsibilities for over 500,000 members of staff.264 When we challenged Ms Horner
about the RemCo’s decisions under her leadership, she stressed that shareholders were
consulted on remuneration. She did not, however, mention to us any of the concerns that
shareholders told us they had expressed.265 When we asked Ms Horner about large pay
increases, she pointed to a decision to offer median pay, but did not offer any justification
for further detaching pay from performance.266 When we sought Ms Horner’s explanation
for the company’s weak clawback terms, she dismissed the concerns of the Institute of
Directors and the FRC.267 She also showed no indication that she believed she had made
any mistakes. Other than being “sorry for what has happened,” she accepted no culpability
as a long-serving member of the board.268
75. A non-executive director and chair of Carillion’s remuneration committee for

four years, Alison Horner presided over growing salaries and bonuses at the top of the
company as its performance faltered. In her evidence to us, she sought to justify her
approach by pointing to industry standards, the guidance of advisors, and conversations
with shareholders. She failed to demonstrate to us any sense of challenge to the advice
she was given, any concern about the views of stakeholders, or any regret at the largesse
at the top of Carillion. Ms Horner continues to hold the role of Chief People Officer of
Tesco, where she has responsibilities to more than half a million employees. We hope
that, in that post, she will reflect on the lessons learned from Carillion and her role in
its collapse.

264 Tesco plc, Executive committee, accessed 1 May 2018
265 Q618 [Alison Horner]; Q622 [Alison Horner]; Q625 [Alison Horner]
36 Carillion
Financial reports
76. Accurate and timely financial reports and accounts of companies are essential to
the functioning of the economy. They are relied upon by lenders, investors and all other
stakeholders in a business. One of the fundamental concepts of accounting is that accounts
are prepared on a true and fair basis. The Companies Act 2006 states that company
directors must not approve accounts unless they are satisfied they give a true and fair
view of the assets, liabilities, financial position and profit or loss of the company.269 In
turn, the auditor gives an opinion as to whether the accounts are true and fair and free
from material misstatement.
Financial performance up to July 2017
77. Until July 2017, there was little public information to suggest that Carillion’s
accounts, which were signed off with an unmodified opinion each year by KPMG as
auditor, presented anything other than a true and fair picture of the company’s finances.
They showed a profitable company. After a sustained fall following the financial crisis in
2008, revenue had grown strongly. Earnings per share had also increased steadily since
2014. Carillion’s profit margins, while unspectacular at around 5–6%, were still “attractive
relative to peers”.270
Figure 3: Carillion’s total revenue
£m
6,000
5,000
4,000
3,000
2,000
1,000
0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Source: Carillion plc Annual Report and Accounts 2005–2016
78. There were, however, indicators of underlying problems. Most notably, borrowing
had increased rapidly, from £242 million in December 2009 to £689 million in December
2016.271 This contributed to a big spike in the company’s debt to equity ratio, which reached
269 Companies Act 2006, section 393

270 Q1026 [Murdo Murchinson]
Carillion 37
5.3 by December 2016, considerably above the ratio of 2 widely considered acceptable.272
The company also had a low level of working capital: its ratio of current assets to current
liabilities remained static at around 1.0 between 2013 and 2016. Anything lower than 1.2
is potentially indicative of a company in financial difficulty.273
Figure 4: Carllion’s working capital ratio
1.3
1.2
1.1
1.0
0.9
0.8
0.7
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Source: Analysis of Carillion plc’s Annual Report and Accounts 1999–2016
July 2017 trading update
79. On 10 July 2017, Carillion issued a sudden profit warning. It announced that it
would reduce the value of several major contracts by a total of £845 million in its interim
financial results, due in September.274 When those results were published, the write-down
went further: £200 million extra was added, completely wiping out the company’s last
seven years of profits and leaving it with net liabilities of £405 million. Borrowing had
risen dramatically again, to £961 million. The goodwill recognised on the balance sheet
was reduced by £134 million and the company’s working capital ratio fell to 0.74.275 The
announcement was an extraordinary reassessment of Carillion’s financial health.
272 Investopedia, What is considered a good net debt-to-equity ratio?, accessed 27 April 2018
273 Investopedia, What does a low working capital ratio show about a company’s working capital management,
accessed 27 April 2018
274 Carillion plc, H1 trading update, 10 July 2017
275 Carillion plc, Financial results for the six months ended 30 June 2017, 29 September 2017
38 Carillion
Figure 5: Carillion’s last 7 years’ profits wiped out by 2017 provision
£m
£1,200
£1,000
2016, £147 m
2015, £155 m
£800
2014, £143 m
£600
2013, £111 m
£1,045 m
£400 2012, £180 m
2011, £143 m
£200
2010, £168 m
£
Profit before tax 2010-2016 Total provision Sept 2017
Source: Analysis of Carillion plc’s annual report and accounts 2010–2017
Figure 6: Carillion’s total equity
£m
1,000
800
600
400
200
-200
-400
-600
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
interim
Source: Carillion plc’s Annual Report and Accounts 2005-2017

Carillion 39
80. The stock market did not wait for the full interim results to pass judgement; the share
price fell by 70% from 192p on Friday 7 July to 57p by Wednesday 12 July. The share price
never recovered, falling to 14p by the time the company eventually filed for liquidation on
15 January 2018.276
Aggressive accounting
81. As the dust settled, many analysts and investors began to question whether it had
all been too good to be true in the first place. The August 2017 Carillion audit committee
papers show that, as investors shied away from offering further equity to the company, a
common question was emerging:
Many have questioned the timing of the provision. Surely management had
known these contracts had been problematic for a while?277
Kiltearn Partners, which owned over 10% of Carillion’s shares at the time the provision
was announced, was very critical of the timing of the profit warning. They argued that
changes of that magnitude do not generally materialise “overnight” and that there are
“clear grounds for an investigation into whether Carillion’s management knew, or should
have known, about the need for a £845 million provision”.278 Euan Stirling, of Aberdeen
Standard Investments,279 concurred, saying “these things do not happen over a short
period of time”.280
82. The provision conceded that £729 million in revenue that Carillion had previously
recognised would not be obtainable.281 This led to accusations that Carillion was engaged
in “aggressive accounting”, stretching what is reasonably allowed by accounting standards
to recognise as much revenue upfront as possible. Sir Amyas Morse, Comptroller and
Auditor General (C&AG), told the Liaison Committee that “when all the drains have been
pulled up on Carillion we will see some pretty aggressive accounting practices”.282
Revenue accounting
83. What would aggressive accounting look like for a company like Carillion? Much
of Carillion’s revenue came from construction contracts that are inherently difficult to
account for. Accruals accounting dictates revenue should be recognised when it is earned,
not when it is received. For construction projects spanning several years, this means
companies must assess how far to completion their projects are. This is usually done by
reference to the costs incurred to date as a percentage of the total forecast costs of the
project.283 Applying that percentage to the initially agreed contract price produces the
276 London Stock Exchange, Carillion share price, accessed 1 May 2018
277 This was a question from a joint presentation by Morgan and Stanley and HSBC to the Carillion audit committee,
22 August 2017,
279 Aberdeen Standard Investments is the investment arm of Standard Life Aberdeen plc, which was formed as a
merger of Standard Life plc and Aberdeen Asset Management plc in August 2017. It was Standard Life who held
shares in Carillion in 2015 and 2016.
281 Carillion’s group business plan shows that of the £1,045 million provision, £729 million went against trade
receivables, with the rest being added to future costs. Carillion’s Group Business Plan, January 2018, p 41
282 Oral evidence taken before the Liaison Committee on 7 February 2018, HC 770 (2017–19), Q5 [Sir Amyas Morse]
283 Carillion’s notes to their financial statements confirm that this is the method that they were using, Carillion plc
Annual Report and Accounts, p 96
40 Carillion
revenue recognised.284 This puts a great emphasis on total estimated costs of a project. As
KPMG’s audit report on Carillion’s 2016 annual report notes, “changes to these estimates
could give rise to material variances in the amount of revenue and margin recognised”.285
A company wanting to indulge in aggressive accounting would make every effort
to minimise the estimates of total final costs to ensure that margins on contracts are
maintained and greater amounts of revenue are recognised up front.
84. Deloitte, Carillion’s internal auditors, explained that the company had two processes
to review margins reported by site teams:286
i) monthly Project Review Meetings (PRMs) at which a management contract

appraisal could adjust the site team’s position; and
ii) peer reviews to “provide challenge to the financial, operational and

commercial performance of contracts”.
85. In July and August 2017, Deloitte examined peer reviews conducted between January
2015 and July 2017 of the contracts which made up the £845 million provision. They found
that management contract appraisals tended to report higher profit margins than peer
reviews.287 In 14% of cases, the peer review recommended a higher margin. In 42% of
cases, three times as many, management used higher margins than recommended by the
peer reviews.288
86. Deloitte noted that the differences between the two assessments were far from trivial:
in more than half the cases where the peer review recommended a lower margin, the
difference exceeded £5 million.289 A November 2016 peer review of the Royal Liverpool
University Hospital contract suggested a loss of 12.7%, compared with the contract
appraisal margin of 4.9% profit.290 The result was that the annual accounts published in
March 2017 recognised approximately £53 million in revenue in excess of what would
have appeared had the peer review estimate been used.291 The July 2017 profit warning
included a provision of £53 million against that contract.292
284 Further complexity is added to this equation by the potential inclusion of insurance claims, incentive payments
and variations arising on the initial contract. Carillion plc’s Annual Report and Accounts 2016, p 96, stated that
these are only recognised as revenue “where it is probable that they will be recovered and are capable of being
reliably measured”.
285 KPMG, independent auditor’s report, included in Carillion plc’s Annual Report and Accounts 2016, p 86
286 Letter from Deloitte to the Chairs, 13 March 2018
287 As above.
290 As above.
291 Deloitte quoted a difference of £53.9 million between those figures. Those figures were based on November
reviews. The audit committee papers show that the year-end position recorded in the financial statements was
based on a profit margin of 4.44%, which would equate to £52.5 million.
292 This figure was part of the initial provision figure of £695m that was presented to the Board on 7th July (August
2017 Audit Committee papers - not published). This was subsequently increased to £845m by July 9th, with a
corresponding increase in the provision against Royal Liverpool of £15m (September 2017 Audit Committee
papers - not published). Keith Cochrane explained that he personally took the decision to increase the provision
over that weekend, Q240 [Keith Cochrane]
Carillion 41
Box 3: Case study: the Royal Liverpool Hospital contract
A private finance initiative contract for the design and construction of the Royal
Liverpool Hospital was agreed by The Hospital Company (Liverpool) Ltd and The
Royal Broadgreen University Hospitals NHS Trust on 13 December 2013. On the
same date, The Hospital Company (Liverpool) Ltd awarded Carillion Construction
Ltd (CCL) a five year, £235 million contract for design and construction.293
CCL began construction work in February 2014, with phase 1 due to be completed by
31 March 2017. As early as May 2015, however, delays were reported due to asbestos,
pushing back expected completion to 30 June 2017.294 Carillion’s Major Project Status
Report in October 2015 acknowledged this delay but estimated a final profit margin
of 5.5%, 2% more than their initial bid estimate.295
In November 2016, two cracks were discovered in concrete beams at the hospital.
Following a review commissioned by CCL, less significant cracks were discovered in
six further beams. Richard Howson told us that Carillion deserved credit for their
actions, because “we did not just cover it up. We properly rectified, even though it
cost, and those beams would probably never fail in their cracked state”.296 However,
Charles McLeod, Director of the Hospital Company, told us that five of the eight
defective beams could have failed under the load of a fully operational hospital. He
said failure to remedy the defects “could have resulted in at best, unsafe working
conditions and at worst, injury and loss of life”.297
Richard Howson said that the costs associated with rectifying the cracked beams
occurred in the second quarter of 2017 and added “over £20 million of cost to our
completion”.298That may tally with Carillion’s public unravelling but it does not
accord with Carillion’s own review process. A November 2016 peer review of the
contract concluded that additional costs meant it was making a loss of 12.7%. Senior
management disagreed, despite having evidence of the cracked beams alongside
continued issues with asbestos, and recorded an expected profit margin of 4.9%. That
led to approximately £53 million in additional revenue being recognised in the 2016
accounts, the same amount that the company eventually made a provision for on that
contract in July 2017.
Carillion’s insolvency has significantly delayed completion of the hospital. The

Hospital Company has entered negotiations with alternative contractors and is
working to agree a revised timetable for completion.299
87. Andrew Dougal, Chair of Carillion’s audit committee, said he was unaware of these
variances and first heard of them when Michael Jones, the Deloitte Partner responsible
293 The Hospital Company (Liverpool) Ltd Annual report and financial statements, December 2014
294 As above.
295 Carillion Major Projects Status Report, October 2015 (not published)
297 Letter from Charles McLeod, CBE, on behalf of the Hospital Company (Liverpool) Ltd, to the Chairs, 21 February
2018, p 3
299 Letter from Charles McLeod, CBE, on behalf of the Hospital Company (Liverpool) Ltd, to the Chairs, 21 February
2018, p 3
42 Carillion
for Carillion’s internal audit, raised them with him in September 2017.300 Michael Jones
confirmed this and said Andrew Dougal was “concerned that these differences did not
appear to have been followed up by management”.301 Andrew Dougal conceded that “in
hindsight, it would have been helpful for the audit committee to have this information so
it could have factored it into its challenge of management’s judgements”.302
88. Carillion also recognised considerable amounts of construction revenue that was
“traded not certified”. This was revenue that clients had not yet signed off, such as for
claims and variations, and therefore it was inherently uncertain whether payment would
be received. In December 2016, the company was recognising £294 million of traded not
certified revenue, an increase of over £60 million since June 2014, and accounting for
over 10% of total revenue from construction contracts.303 The amount of revenue that was
traded not certified was never publicly disclosed in financial statements, but was included
in papers reviewed quarterly by the audit committee.
89. Zafar Khan, who signed off the 2016 accounts, said he did “not agree that there was
a concerted effort to adopt aggressive accounting as such” and that the numbers reported
“were appropriate, based on the information that was available at that point in time”.304 As
part of a contract review that led to the July 2017 provision, management were asked by
KMPG to consider whether the results indicated that the 2016 accounts had been misstated
due to either fraud or error. The position the board chose to adopt publicly was that there
was no misstatement and that the provisions all related to the sudden deterioration of
positions on key contracts between March and June 2017.305
90. Carillion’s problems were not, however, restricted to just a few contracts: September
2017 audit committee papers showed that at least 18 contracts suffered losses over the
March-June period.306 Internal board minutes show the board were aware of concerns
about aggressive accounting methods. A June 2017 lessons learned board meeting minute
noted that “management need to be aware that high-level instructions such as that to
‘hold the position’ (i.e. maintain the traded margin) may, if crudely implemented, have
unintended consequences”.307 Those minutes show that Andrew Dougal identified a “hold
back of bad news”, with regard to one major contract.308 He subsequently told us the
contract in question was the Royal Liverpool Hospital.309 A board minute from August
2017 notes concerns from Keith Cochrane that long-serving staff in the business had a
tendency to turn a blind eye to such practices. While there were corporate incentives
to present a hugely optimistic picture, there were also individual incentives for staff
rewarded on the basis of published results. March 2015 board minutes show the board
was concerned that potential clawback of their bonuses should not include “retrospective
judgements on views taken on contracts in good faith”.310
300 Letter from Andrew Dougal to the Chairs, 5 April 2018

303 February 2017 audit committee papers (not published)
304 Q273 [Zafar Khan]
305 KPMG, Enhanced contracts review and half year update, 9 July 2017 (not published)
306 Carillion Audit Committee papers, September 2017 (not published)
307 Carillion plc, Lessons Learned Board Pack, June 2017, p 66
308 Carillion plc, Lessons Learned 7 June Minutes (not published)
310 Carillion plc, Minutes of a meeting of the Board of Directors, 3 March 2015
Carillion 43
Accounting for the early payment facility
91. It is not only Carillion’s revenue accounting that has been called into question since
the company collapsed. Two major credit ratings agencies, Moody’s and Standard & Poor’s,
claimed that Carillion’s accounting for their early payment facility (EPF) concealed its
true level of borrowing from financial creditors.311 They argue the EPF structure meant
Carillion had a financial liability to the banks that should have been presented in the
annual account as “borrowing”. Instead Carillion choose to present these as liabilities
to “other creditors”. Moody’s claim that as much as £498 million was misclassified as
a result, though Carillion’s audit committee papers show the actual figure drawn was
slightly lower at £472 million.312
92. The Financial Reporting Council (FRC) would not confirm whether they agreed
with this assessment.313 They set out the relevant accounting standards and noted
that the precise terms of any supply chain financing arrangement will dictate how it
is accounted for. They did write, however, that they “encourage disclosure of complex
supply chain arrangements”.314 Carillion’s financial statements did not highlight the EPF.315
Some analysts, however, spotted it.316 Carillion’s board minutes in April 2015 refer to
“disappointing” UBS analysis that had factored both the pension deficit and the EPF
in Carillion’s total debt position. The May 2015 minutes state that the shorting (betting
against) Carillion shares was up significantly and that the “bulk had followed the UBS
note in March”.317
93. Carillion’s classification of the EPF was advantageous to its presentation of its finances
in two main ways. First, presenting drawing on the EPF as “other creditors” excluded it
from total debt. It was consequently not incorporated in a debt to earnings ratio which
was a key covenant test between Carillion and its lenders.318 Carillion announced in its
third profit warning on 17 November 2017 that it was likely to breach that covenant.319
Had £472 million been classified as debt, it would most likely have breached this covenant
test far earlier.
94. Second, Carillion’s EPF treatment helped hide its failure to generate enough cash to
support the revenues it was recognising. Carillion had a target of 100% cash conversion: for
cash inflows from operating activities to at least equal underlying profit from operations.
It consistently reported that it was meeting this target.320 It could do this because the
EPF classification allowed it, in cashflow statements, to present bank borrowing as cash
311 Moody’s, Carillion’s collapse exposes flaws in the accounting for supply-chain finance, 13 March 2018; S&P
Global Ratings, Carillion’s Demise: What’s at stake?, 23 March 2018
312 Moody’s, Carillion’s collapse exposes flaws in the accounting for supply-chain finance, 13 March 2018; Carillion,
Group short term cash flow forecast, 22 December 2017 (not published)
313 Letter from the FRC to the Chairs, 21 March 2018
314 As above.
315 There is one reference to the early payment facility in the 2016 Annual Report and Accounts within the strategic
report section, but nothing in the financial statements. Carillion plc, Annual Report and Accounts 2016, p 13
316 Carillion plc, Minutes of a meeting of the Board of Directors, 2 April 2015
317 Carillion plc, Minutes of a meeting of the Board of Directors, 6 May 2015
318 The ratio was net debt to EBITDA (earnings before interest, taxes, depreciation and amortisation).
319 BBC News, HS2 contractor Carillion’s shares hit by profit alert, 17 November 2017
44 Carillion
inflow from operations, rather than from financing activities.321 Moody’s found that
between 2013 and 2016, Carillion reported cash inflows from operations of £509 million, a
conversion rate of over 100% on group operating profit of £501 million.322 But reclassifying
EPF inflows of £472 million as financing activities would mean out of an operating profit
of £501 million, only £37 million was cash-backed, a conversion rate of 7%. This exposes
Carillion’s accounting revenue practices: revenue will at times correctly be recognised
before the cash comes in, but as the C&AG said, “if your cash never really comes in,
that may be a sign that you need to look about how you have been accounting for these
businesses”.323
95. The Carillion board have maintained that the £845 million provision made in
2017 was the unfortunate result of sudden deteriorations in key contracts between
March and June that year. Such an argument might hold some sway if it was restricted
to one or two main contracts. But their audit committee papers show that at least 18
different contracts had provisions made against them. Problems of this size and scale
do not form overnight. A November 2016 internal peer review of Carillion’s Royal
Liverpool Hospital contract reported it was making a loss. Carillion’s management
overrode that assessment and insisted on a healthy profit margin being assumed in the
2016 accounts. The difference between those two assessments was around £53 million,
the same loss included for the hospital contract in the July 2017 profit warning.
96. Carillion used aggressive accounting policies to present a rosy picture to the
markets. Maintaining stated contract margins in the face of evidence that showed
they were optimistic, and accounting for revenue for work that not even been agreed,
enabled it to maintain apparently healthy revenue flows. It used its early payment
facility for suppliers as a credit card, but did not account for it as borrowing. The only
cash supporting its profits was that banked by denying money to suppliers. Whether or
not all this was within the letter of accountancy law, it was intended to deceive lenders
and investors. It was also entirely unsustainable: eventually, Carillion would need to
get the cash in.
Carillion’s finance directors
97. Responsibility for the preparation of the accounts lies collectively with the board,
which may delegate that task to the Finance Director. Richard Adam was Carillion’s
Finance Director from 2007 until he retired at the end of 2016. He was replaced by Zafar
Khan, previously the Group Financial Controller, who only lasted nine months before
being sacked. Mr Khan was replaced in September 2017 by Emma Mercer, who remained
in post until the company collapsed.324
321 Cashflow statements break down how cash is generated within a company. The cash flows from operating
activities is essentially the cash that been generated through trading, whereas the financing cash flows show
the cash generated through borrowing and equity. By presenting money borrowed under the early payment
facility as “other creditors”, it’s classification within the cashflow can be seen as part of the company’s operating
activity rather than a financing activity.
322 Moody’s, Carillion’s collapse exposes flaws in the accounting for supply-chain finance, 13 March 2018
323 Oral evidence taken before the Liaison Committee on 7 February 2018, HC 770 (2017–19), Q7 [Sir Amyas Morse]
324 Emma Mercer did not join Carillion plc’s board.
Carillion 45
Emma Mercer
98. Emma Mercer was the only director prepared to concede that Carillion were engaged
in aggressive accounting. She told us that when she returned to the UK in April 2017,
having spent three years in the Canadian part of the business, there was a “slightly more
aggressive trading of the contracts than I had previously experienced in the UK”.325 In
further correspondence, she elaborated this could be seen in the “number and size of
contracts where significant judgements were being made in relation to the recognition of
uncertified revenue in construction contracts”.326
99. Ms Mercer appeared to bring a level of discipline and accuracy to Carillion’s

accounting policies that had been severely lacking. On her return, she quickly spotted
an anomaly in the way the company was classifying receivable balances on construction
contracts,327 calling it “sloppy accounting”.328 The board agreed that her concerns should
be investigated, but shied away from a full independent review. Instead, the board invited
the company’s auditor, KPMG, to review work that it had previously audited and approved.
KPMG agreed with the board’s conclusion that although Carillion had misclassified
assets, it had not misstated revenue. That review did, however, act as the trigger for the
wider contract review that led to the £845 million provision in July 2017.329
100. Emma Mercer is the only Carillion director to emerge from the collapse with any
credit. She demonstrated a willingness to speak the truth and challenge the status quo,
fundamental qualities in a director that were not evident in any of her colleagues.
Her individual actions should be taken into account by official investigations of the
collapse of the company. We hope that her association with Carillion does not unfairly
colour her future career.
Zafar Khan
101. Emma Mercer was in post because the board lost faith in Zafar Khan after only nine
months as Finance Director. Mr Khan told us that he “spooked” the Carillion board in
September 2017 with a presentation he felt gave nothing more than an honest assessment
of the company’s position.330 Philip Green told us, however, that the board concluded
collectively that he was “not close enough to the underlying business unit numbers” and
not the “right person” to participate in negotiations with the company’s banks.331 Our
evidence certainly supports the board’s view. In oral evidence, he claimed success in his
top priority of reducing the company’s debt, before eventually admitting “debt increased
through 2017”.332 Board minutes from May 2017 show that, when Emma Mercer
raised concerns about accounting irregularities, Mr Khan suggested that they showed
“incompetence and laziness in the accounting review of the contract”.333 As the then
325 Q264 [Emma Mercer]

326 Letter from Emma Mercer to the Chairs, 5 March 2018
327 Emma Mercer’s concern was that Carillion were using “negative accruals”, which were netting off payables and
receivables balances. Whilst KPMG confirmed this was permitted under international accounting standards on
construction contracts, Carillion had a “golden rule” not to do so.
328 Carillion plc, minutes of a meeting of the Board of Directors, 15 May 2017, p 4
329 As above.
330 Q314 [Zafar Khan]; Letter from Zafar Khan to the Chairs, 21 February 2018
332 Qq342–44 [Zafar Khan]
333 Carillion plc, Minutes of a meeting of the Board of Directors, 9 May 2017, p 4
46 Carillion
Finance Director, this charge lay ultimately at his door. Although he may not have been
the architect of those policies, his previous role as group financial controller hardly meant
this was a man lacking in experience of how the company operated.
102. Zafar Khan failed to get a grip on Carillion’s aggressive accounting policies or
make any progress in reducing the company’s debt. He took on the role of Finance
Director when the company was already in deep trouble, but he should not be absolved
of responsibility. He signed off the 2016 accounts that presented an extraordinarily
optimistic view of the company’s health, and were soon exposed as such.
Richard Adam
103. The dominant personality in Carillion’s finance department was Richard Adam. He
was in charge for most of the last decade, and received a final pay package of £1.1 million
in December 2016.334 Andrew Dougal said Mr Adam “exercised tight control over the
entire finance function, had extensive influence through the Group” and “was defensive
in relation to some challenges in board meetings”.335 His approach to negotiating with
the pension Trustee similarly suggested someone who exerted control and refused to
compromise. It is impossible to imagine that any significant accounting policy decisions
were made without his prior approval.
104. Mr Adam got out at the right time. He told us that he could do no more than speculate
as to what went wrong with the company, as in his view he had left it in December 2016
in a healthy state.336 Despite that assessment, he was quick to offload all the shares he had
acquired over his years in the business. He sold his entire holding on the day the rosy
2016 accounts were published, and then his 2014 long term performance award shares on
the day they vested in May 2017. He told us he does not hold shares because of the risks
involved.337 In total, he sold shares worth a total of £776,000 between March and May
2017, at an average price of 212p.338 The share price fell to 57p by mid-July.
105. Richard Adam, as Finance Director between 2007 and 2016, was the architect of
Carillion’s aggressive accounting policies. He, more than anyone else, would have been
aware of the unsustainability of the company’s approach. His voluntary departure at
the end of 2016 was, for him, perfectly timed. He then sold all his Carillion shares
for £776,000 just before the wheels began very publicly coming off and their value
plummeted. These were the actions of a man who knew exactly where the company was
heading once it was no longer propped up by his accounting tricks.
Conclusions on Carillion’s board

106. In their evidence to us, Carillion’s directors gave no indication that they accepted
any blame for their decisions that ultimately led to the collapse of the company. They
sought to point the finger at anyone or anything else they could find. Rather than a failure
of management, the collapse of Carillion was, to them, the fault of their advisers, the
Bank of England, the foreign exchange markets, Brexit, the snap 2017 General Election,

Carillion 47
Carillion’s investors, Carillion’s suppliers, the entire UK construction industry, Middle

Eastern business culture, the construction market of Canada, and professional designers
of concrete beams.339
107. Carillion’s directors, both executive and non-executive, were optimistic until the
very end of the company. They had built a culture of ever-growing reward behind the
façade of an ever-growing company, focused on their personal profit and success. Even
after the company became insolvent, directors seemed surprised the business had not
survived.
108. Once the business had completely collapsed, Carillion’s directors sought to blame
everyone but themselves for the destruction they caused. Their expressions of regret
offer no comfort for employees, former employees and suppliers who have suffered
because of their failure of leadership.
339 Q234 [Keith Cochrane]; Qq238–9 [Keith Cochrane]; Q282 [Zafar Khan]; Q298 [Zafar Khan]; Qq305–6 [Zafar
Khan]; Q381 [Keith Cochrane]; Q385 [Keith Cochrane]; Q445 [Richard Howson]; Qq448–452 [Philip Green]; Q462
[Philip Green]
48 Carillion
2 External checks and balances

Investors
109. While ultimate responsibility for the success of a company rests with the board,
shareholders have an important role in holding the board to account for its performance.
Under the principles set out in the FRC’s Stewardship Code, investors monitor the
performance of companies in which they invest, including by checking on the effectiveness
of leadership and the quality of reporting.340 The Code sets out a menu of options for
escalating stewardship activities where there are concerns, from private meetings with
board members to public statements and voting against resolutions at annual general
meetings. It states that investors should be willing to act collectively with other investors
when there are risks that threaten to destroy shareholder value or at times of “significant
corporate stress”.341
110. The stewardship activities of some of the major shareholders in Carillion in March
2017 are set out in the table below. The different approaches adopted in the final months
of trading are in part a reflection of the different investment strategies of the investors and
the preferences of their clients. For BlackRock, most of their investments were through
passively managed funds which were sold automatically as Carillion shares fell out of
the tracked indexes. The Canadian investor, Letko, Brosseau & Associates, on the other
hand, continued to see Carillion as a long-term investment and were willing to consider
offering additional support even after the initial profit warnings. Shareholders, including
BlackRock, did push back successfully on proposals by the remuneration committee to
increase the maximum bonus opportunity from 100% to 150%, but these objections were
a protest against the pay proposals rather than a proxy for discontent with the company’s
performance.342
Table 1: Investor engagement
Company Shareholding on 1 Engagement activities

March 2017 (%)
BlackRock Inc. 8.81 Discussions with board prior to March 2017,
including in February on remuneration
arrangements. Voted in favour following changes
to maximum bonus proposals. Long and short
positions held for clients. No engagement after
March 2017. Majority of shares held in passive
funds, sold in line with changes to indexes arising
from profit warnings.
Brewin Dolphin 5.00 Met CEO and FD on 9 March 2017 for routine
Ltd shareholder meeting and options for improving
financial position discussed. Shareholdings
reduced during 2017 in the light of changing
assessment of the investment, accelerated after
July profit warning.
340 Financial Reporting Council, Stewardship Code, Principle 3

342 Q1076 [Amra Balic]; Letter from Alison Horner to BlackRock, 7 March 2017
Carillion 49
Company Shareholding on 1 Engagement activities

March 2017 (%)
Deutsche Bank 5.82 Not proprietary investments. Shares held on
AG behalf of clients and for hedging purposes. No
engagement with Carillion management.
Kiltearn 5.01* Continued to buy Carillion shares on behalf of
Partners LLP clients until early July 2017. Kiltearn voted all its
shares against the Remuneration Report in May
2017 due to “excessive” pay award to the CEO
and concerns about debt and working capital
levels.
Met CEO on 17 July to discuss funding gap.

Concluded that recovery was “unlikely” and
that no effective assessment could be made of its
finances due to unreliability of published financial
information. Began selling shares on 3 August
2017. Kiltearn met CEO on 13 October and,
unconvinced by his answers to questions, sold all
shares by 4 January 2018.
Letko, Brosseau 4.97 No change in plans or engagement after March

& Associates 2017 until July profit warning, although a routine
Inc. review call, requested on 13 June, was not met.
After an urgent call on 10 July, shares held on
basis that there was a “fair chance” of Carillion
remaining a going concern; a further injection of
capital considered. Further engagement around
September profit warning. After November
profit warning, view was taken that recovery was
“unlikely” and all shares sold rapidly.
Standard Life 4.96** Standard Life1 began to gradually divest in
Aberdeen December 2015 owing to concerns about
financial management, strategy and corporate
governance. Bi-annual meetings with Carillion
board from 2014, at which concerns were raised
about widening pension deficit, high levels of
debt, weak cash generation an unwillingness of
board to change strategic direction. Meeting with
CEO on 17 July, by which time shareholding was
minimal. All shares sold by end of 2017.
Source: Letters from investors and oral evidence. Shareholding figures from Carillion Annual Report 2016.
* According to Kiltearn, this figure should be 10%. ** According to Standard Life Aberdeen, this figure should be 0.56%
at this date.
1 Standard Life merged with Aberdeen Asset Management in in August 2017. Aberdeen held limited shares in Carillion
during this period, mainly in passive funds, and had little direct engagement with the board.
111. Effective stewardship by investors depends in large part on the availability of

trustworthy financial reporting and on honest engagement with board members in
response to the raising of concerns. The Carillion board failed on both these counts.
In private meetings with the board, the Standard Life representative, Euan Stirling,
referred to the fact that “the financial statements have been made to reflect a much more
50 Carillion
optimistic outlook for the company”,343 and that there was “a gloss to the presentations
that we felt did not reflect the true business circumstances”.344 BlackRock shared the view
that management teams were “overly optimistic” and retained its position of not actively
investing in a company it did not view as an “attractive investment proposition”.345 For
Standard Life, direct engagement was an important element of their investment strategy,
and they began to divest as those meetings revealed that the board was not going to
change direction in the face of their concerns.346 Other investors, with less resources to
devote to direct engagement, relied heavily on the published financial information. Murdo
Murchison, Chief Executive of Kiltearn Partners, told us that, in the light of the July 2017
profit warning, that information “could no longer be considered reliable”:347
What was brought to the table in July last year was evidence of misstatement
of profits over a prolonged period of time, evidence of aggressive accounting
and evidence of extremely poor operational management, which was
completely at odds with the way the business was presented to the
marketplace.348
Following the July 2017 profit warning, Kiltearn met Keith Cochrane, by then interim
Chief Executive of Carillion, on 17 July and 13 October. Unimpressed by his inability
to offer “any meaningful information” about how the company proposed to address its
financial problems or “give answers that Kiltearn considered satisfactory to relatively
straightforward questions”, they determined they could only continue to sell shares.349
112. Representatives of the institutional investors were, at best, frustrated by the behaviour
and performance of the Carillion board.350 Kiltearn, unhappy with the level and timeliness
of financial disclosures, were considering legal action in respect of what they considered
could be “dishonest concealment” of information in the 2016 annual report.351 In spite of
these significant concerns on the part of some major investors, as a group these owners of
the company did not manage to act in a co-ordinated manner to exert effective influence
on the board of Carillion.
113. Major investors in Carillion were unable to exercise sufficient influence on the
board to change its direction of travel. For this the board itself must shoulder most
responsibility. They failed to publish the trustworthy information necessary for
investors who relied on public statements to assess the strength of the company.
Investors who sought to discuss their concerns about management failings with the
board were met with unconvincing and incompetent responses. Investors were left
with little option other than to divest.
114. It is not surprising that the board failed to attract the large injection of capital
required from investors; we are aware of only one who even considered this possibility.
In the absence of strong incentives to intervene, institutional investors acted in a
rational manner, based on the information they had available to them. Resistance to
343 Q1033 [Euan Sterling]
Carillion 51
an increase in bonus opportunities, regrettably, did not extend to direct challenges to

board members. Carillion may have held on to investors temporarily by presenting
its financial situation in an unrealistically rosy hue; had it been more receptive to the
advice of key investors at an earlier stage it may have been able to avert the darkening
clouds that subsequently presaged its collapse.
Auditors
115. It is the responsibility of the board of directors to prepare and approve the company’s
financial accounts.352 The role of the auditor is to obtain reasonable assurance about
whether the financial statements as a whole are free from material misstatement.353 If they
are unable to obtain sufficient appropriate audit evidence to support that assessment, they
should issue a modified opinion on the accounts, noting the areas of the accounts that are
the cause of that modification.354
116. KPMG were Carillion’s auditors for all 19 years of the company’s existence from
1999. Such a long tenure inevitably calls into question whether they could provide the
independence and objectivity that is crucial to high-quality audit. Legislation passed in
2014 requires listed companies to change their audit firm after a maximum of 20 years.355
Transitional arrangements, however, meant that Carillion would not have had to replace
KPMG until 2024.356 KPMG said that its independence was not impaired after 19 years
auditing Carillion. Michelle Hinchliffe, KPMG’s Head of Audit, said she did not believe
this was “too long to be impartial” and that “independence for me is a mindset. For
myself and all my fellow partners, independence and integrity are absolutely critical to
our profession”.357
117. Over 19 years, KPMG charged Carillion £29 million in audit fees, alongside additional
charges for taxation and other assurance services. Carillion’s financial statements show
that over that period, KPMG never found reason to offer a qualified audit opinion on the
accounts. On 29 January 2018, shortly after Carillion collapsed, the FRC announced an
inquiry into the 2014, 2015 and 2016 audits, with particular focus on the “company’s use
and disclosure of the going concern basis of accounting, estimates and recognition of
revenue on significant contracts, and accounting for pensions”.358 KPMG welcomed the
investigation, stating “it is important that regulators acting in the public interest review
the audit work related to high profile cases such as Carillion”.359
KPMG’s enhanced contract review
118. When we questioned KPMG about the provision Carillion made in July 2017,
KPMG’s responses mirrored those of Carillion’s directors: the causes all related to events
that took place after the publication of the accounts on 1 March 2017. They listed factors
352 Companies Act 2006, section 394 and section 414

353 Financial Reporting Council, International Standard on Auditing (UK) 200 (revised June 2016), p 4
354 Financial Reporting Council, International Standard on Auditing (UK) 705 (revised June 2016), p 3
355 Financial Reporting Council, Audit tender notes on best practice, February 2017, p 4
357 Qq944–45 [Michelle Hinchliffe]
2018
359 Letter from KPMG to the Chairs, 2 February 2018
52 Carillion
including “worsening delays leading to forecast reassessments”, “unexpected site-specific

developments” and “the developing political and economic situation in the Middle East,
particularly events in Qatar”, as being responsible for the contract provision.360
119. Those conclusions followed an enhanced management review of key contracts in

May 2017, which was audited by KPMG. KPMG noted that the review was a “deep dive”,
and “beyond the level of detail that would typically be completed by the audit team”.361
They also highlighted some of Carillion’s aggressive accountancy practices, including that
“claims are booked earlier in the Group than would be by certain others in the industry”
and that there was “a lack of consistency and guidance around the Group in when to
recognise value on claims”.362 That these findings only became apparent after “deep dives”
raises questions over the adequacy of KPMG’s core audit work. Peter Meehan, the KMPG
Audit Partner who signed off the accounts, told us that his company’s previous work was
extensive, citing large numbers of site visits.363 Yet KPMG neither identified nor challenged
Carillion’s aggressive approach to revenue accounting on specific contracts.
120. KPMG was aware that recognition of contract revenue was the most significant
risk in Carillion’s accounts: it is acknowledged as such in its 2016 audit report.364 The
report narrative, however, merely described in general terms the inherent risks around
accounting for construction contracts and described generic audit procedures carried out
to mitigate that risk. KPMG did not in any way allude to Carillion’s unusually optimistic
outlook. Murdo Murchison told us that his investment company relied on audited financial
results, but they were “clearly not a good guide” to the state of Carillion.365 More valuable
information was included in KPMG’s February 2017 presentation to the Carillion audit
committee, which noted that “overall the traded position on contracts is challenging,
but when considered in conjunction with the provisions [ … ] is reasonable”.366 That
conclusion too was flawed, but it did at least admit to contract challenges. This concern
was not, however, deemed worthy of inclusion in KPMG’s published audit report.
KPMG failings and goodwill
121. KPMG’s blind spots with regard to Carillion were not isolated to its audits of that
company. The FRC examines a sample of audits for each major audit firm operating in
the UK in annual audit quality reviews (AQR). Though Carillion was not part of the
FRC’s 2016–17 KPMG sample, the report of that review called on KPMG to “re-assess
[its] approach to the audit of revenue and the related training provided” and found that
“insufficient revenue testing was performed on certain audits”.367
122. The AQR report also noted weaknesses in KPMG’s testing for impairments to
goodwill, stating that there was sometimes “insufficient challenge of management’s
assumptions”.368 Carillion’s balance sheet was propped up by goodwill. In the 2016
accounts it was recorded as £1.6 billion, 35% of the company’s gross assets and more

362 As above.
363 Q789 [Peter Meehan]
366 Carillion plc, February 2017 Audit Committee papers (not published)
367 Financial Reporting Council, KPMG LLP KPMG Audit plc Audit quality inspection, June 2017
368 Financial Reporting Council, KPMG LLP KPMG audit plc Audit quality inspection, June 2017
Carillion 53
than double its net assets of £730 million.369 This goodwill was accumulated through
acquisitions, as the difference between the book value of the company purchased and
the price Carillion paid. It accounts for intangible assets of the purchased companies,
such as the workforce, brand, and synergies with Carillion. It is reasonable to posit that
these assets might decline over time, particularly if, like Eaga for example, the purchased
business proved to be loss-making. Accounting standards require the assumptions used
to estimate goodwill to be tested each year to evaluate whether it should be impaired, or
reduced in value, in the accounts.370
123. Carillion’s goodwill was never impaired in its annual accounts.371 This indicates the
company remained confident that the amount it paid for each acquisition was justified
due to the continued economic benefits it expected to derive from them. This is difficult
to justify for some of Carillion’s purchases. £330 million of goodwill was recorded when
Eaga was purchased in 2011,372 yet after five consecutive years of substantial losses,
that figure remained unchanged, despite Philip Green admitting the purchase was a
“mistake”.373 KPMG’s 2017 half-year update to the board indicates the flimsiness of
Carillion’s calculations that justified not impairing any of their goodwill. They found
that “historically at least 80% of the Group’s net present value has been derived from the
perpetuity calculation”.374 This means that 80% of the value of cash flows Carillion hoped
to achieve through acquisitions was predicated on the assumption that those cash flows
would continue in perpetuity. Such assumptions were not disclosed by the company or its
auditor. The Secretary of State for Business, Energy and Industrial Strategy has confirmed
that the FRC are looking at Carillion’s treatment of goodwill as part of their investigation.375
124. KPMG audited Carillion for 19 years, pocketing £29 million in the process. Not
once during that time did they qualify their audit opinion on the financial statements,
instead signing off the figures put in front of them by the company’s directors. Yet,
had KPMG been prepared to challenge management, the warning signs were there
in highly questionable assumptions about construction contract revenue and the
intangible asset of goodwill accumulated in historic acquisitions. These assumptions
were fundamental to the picture of corporate health presented in audited annual
accounts. In failing to exercise—and voice—professional scepticism towards Carillion’s
aggressive accounting judgements, KPMG was complicit in them. It should take its
own share of responsibility for the consequences.
Advisors
125. Carillion’s board were supported by an assortment of companies offering a range of
professional services. Among these were Deloitte, who alongside KPMG, EY and PwC
comprise the “Big Four” audit and professional services firms. Deloitte acted as Carillion’s
369 Carillion plc, Annual Report and Accounts 2016, p 93 and p 109
370 International Financial Reporting Standards, IAS 36 Impairment of Assets, accessed 1 May 2018. Up until 2004,
the reporting standards allowed for goodwill to be amortised rather than tested annually for an impairment.
Amortisation reduces the value of an intangible asset annually so if this accounting treatment had still been in
force, Carillion would have had to report substantially lower levels of goodwill in their accounts.
371 An impairment of £134 million was included in the interim financial statements for 2017. Carillion plc, Financial
results for the six months ended 30 June 2017, p 1
54 Carillion
internal auditors, charging on average £775,000 a year since 2010.376 The role of internal
audit is to “provide independent assurance that an organisation’s risk management,
governance and internal control processes are operating effectively”.377 Although Deloitte
made a number of recommendations through their internal audit reports, they rarely
identified issues as high priority. Only 15 out of 309 recommendations between 2012
and 2016 were deemed as such.378 Likewise, across 61 internal audit reports in 2015 and
2016, only a single report in 2016 found inadequate controls.379 They were responsible for
advising on financial controls such as debt recovery,380 yet were unaware of the dispute with
Msheireb over who owed whom £200 million. They also did not appear to have expressed
concern over the high risk to the business of a small number of contracts not being met.381
Deloitte were responsible for advising Carillion’s board on risk management and
financial controls, failings in the business that proved terminal. Deloitte were either
unable to identify effectively to the board the risks associated with their business
practices, unwilling to do so, or too readily ignored them.
126. Deloitte’s role with Carillion was not confined to internal audit. Among other roles,
they acted as advisors to the remuneration committee, offered due diligence on the
disastrous takeover of Eaga in 2011 and then received £730k for attempting a subsequent
transformation programme at Eaga.382 Such widespread involvement in Carillion was
simply par for the course for the Big Four accountancy firms. Over the course of the last
decade, they collectively received £51.2 million for services to Carillion, a further £1.7
million for work for the company’s pension schemes and £14.3 million from Government
for work relating to contracts with Carillion.383
127. EY, another member of the Big Four, were particularly heavily involved with
Carillion after the profits warning in July 2017. They were appointed to oversee “Project
Ray”, a transformation programme designed to reset the business.384 Carillion paid them
£10.8 million over a six-month period,385 in part to identify up to £123 million of cost
savings, mainly to be met through a 1,720 reduction in full-time UK employees.386 Those
savings were not achieved before the company collapsed. EY also helped negotiate the
agreement with the pension Trustee to defer £25 million in deficit recovery contributions
and a “time to pay” arrangement with HMRC in October 2017 that deferred £22 million
of tax obligations.387 As we noted earlier, EY even suggested extending standard payment
terms to suppliers to 126 days.388 Their own fees, however, were not deferred. On Friday
12 January 2018, three days before the company was declared insolvent and one day before
376 Letter from Deloitte to the Chairs, 2 February 2018

377 Chartered Institute of Internal Auditors, About Us, accessed 1 May 2018
378 Analysis of Deloitte’s internal audit reports to the audit committee.
379 As above.
380 Q811 [Michael Jones]
381 Q807 [Michael Jones]
382 Letter from Deloitte to the Chairs, 2 February 2018
383 Work and Pensions Committee, Committees publish responses from Big Four on Carillion, 13 February 2018.
Note that the original total quoted here for pension scheme work was £6.1 million. PwC subsequently informed
us that out of a total of £4.6 million that they gave us for work done on the Electric Supply Pension Scheme, only
£200,000 related to Carillion. Letter from PwC to the Chairs, 23 February 2018
384 Letter from EY to the Chairs, 25 January 2018
385 As above.
386 EY Project Ray Board meeting, Carillion audit committee papers, 22 August 2017 (not published)
387 Carillion plc, Weekly reporting pack, 27 October 2017 (not published)
388 Carillion plc, Weekly reporting pack for week ending 26 November actuals, 8 December 2017 (not published)
Carillion 55
Philip Green wrote to the Government pleading for taxpayer funding to keep the company
going, Carillion paid EY £2.5 million. On the same day, it paid out a further £3.9 million
to a raft of City law firms and other members of the BigFour.389
Table 2: Carillion’s payments to advisers on 12 January 2018
Advisor name Amount paid (£)

KPMG 78,000
Willkie Farr & Gallagher UK 164,016
Sacker & Partners 37,211
Mills & Reeve 20,621
Lazard & Co 551,716
FTI Consulting 1,018,666
Freshfields Bruckhaus Deringer 91,165
Ernst & Young 2,508,000
Clifford Chance 149,104
PricewaterhouseCoopers 276,000
Akin Gump 305,549
Slaughter and May 1,196,093
Total 6,396,141
128. Philip Green told us that Carillion “took advice every step of the way” from a range
of big name advisers:390
We sought very strongly at Carillion to make sure that we had quality advice,
whether it was Slaughter & May as our lawyers, Lazard as our bankers or
Morgan Stanley as our brokers. We believed we had high quality advice in
the Carillion situation [ … ].391
Though Philip Green listed Morgan Stanley above, his board marginalised them as
brokers in July 2017. This decision was taken after Morgan Stanley told the Carillion board
that it would not underwrite a proposal to raise further equity.392 This was because it
had concluded that “Carillion’s senior management could neither produce nor deliver an
investment proposition that would convince shareholders and new investors to support the
potential rights issue”.393 After Morgan Stanley’s representatives left that board meeting,
the board concluded the broker’s position was “not credible” and that while it would
be necessary to “continue to work with them as brokers in the short term that would
clearly change in the future”.394 Morgan Stanley confirmed that HSBC were appointed
as joint corporate broker on 14 July and that thereafter “Carillion sought our advice less
frequently”.395
129. Carillion’s directors were supported by an array of illustrious advisory firms.

Names such as Slaughter and May, Lazard, Morgan Stanley and EY were brandished
389 Business, Energy and Industrial Strategy Committee and Work and Pensions Committee, Carillion paid out £6.4
million to advisors before £10 million taxpayer bailout, 12 March 2018
393 As above.
394 Letter from Morgan Stanley to the Chairs, 21 February 2018
395 As above.
56 Carillion
by the board as a badge of credibility. But the appearance of prominent advisors proves
nothing other than the willingness of the board to throw money at a problem and the
willingness of advisory firms to accept generous fees.
130. Advisory firms are not incentivised to act as a check on recklessly run businesses.
A long and lucrative relationship is not secured by unduly rocking the boat. As
Carillion unravelled, some firms gave unwelcome advice. Morgan Stanley explained
that the opportunity to raise equity to keep the company afloat had passed. Carillion
simply marginalised them and sought a second opinion. By the end, a whole suite
of advisors, including an array of law firms, were squeezing fee income out of what
remained of the company. £6.4 million disappeared on the last working day alone as
the directors pleaded for a taxpayer bailout. Chief among the beneficiaries was EY,
paid £10.8 million for its six months of failed turnaround advice as Carillion moved
inexorably towards collapse.
Pension trustees
131. Trustees invest the assets of a pension scheme and are responsible for ensuring it is
run properly and that members’ benefits are secure.396 In this role, trustees negotiate with
the sponsoring employer on behalf of the scheme members. As we noted earlier in this
report, a single trustee board (the Trustee) represented the large majority of Carillion’s DB
scheme members.397
132. Gazelle, who acted as covenant advisors to the Trustee, told us that Carillion may
have set out to “manage” the Trustee so that it “did not present an effective negotiating
counterparty” to the company.398 This was done in part through the “dominating
influence” of Carillion employees, who faced an inherent conflict of interest, on the Trustee
board.399 Robin Ellison, the Trustee Chair, disagreed stating that “all the directors of the
trust company were independently-minded”.400 Gazelle also cited Carillion’s budgetary
control over the Trustee that “may have limited the ability of the Trustee to itself obtain
detailed advice on more complex issues”, and pressure exerted on the scheme actuary by
Carillion at trustee meetings.401
133. Despite these limitations, and as we considered earlier in this report, the Trustee
pushed Carillion hard to secure additional contributions to fund the pension deficits.
They also consistently acted on advice from The Pensions Regulator on their approach
to dealing with company.402 Both the 2008 and 2011 valuations were agreed well outside
the statutory 15-month deadline as the Trustee sought to obtain a better deal. Although
agreements were eventually signed by the Trustee and Carillion on these valuations,
Robin Ellison argued that they were effectively “imposed”.403 As Mr Ellison noted, “the
396 The Pensions Regulatory, Guidance for Trustees, accessed 22 April 2018
397 Trustee data shows that at the end of 2013, total membership across the six schemes under the trusteeship of
Carillion (DB) Pension Trustee Ltd was 20,587 - Carillion plc’s Annual Report and Accounts 2013 show that total
membership across all schemes was 28,785 at the end of 2013.
399 As above. Trustees who are employees of the sponsor are a common feature of Trustee boards.
400 Q151 [Robin Ellison]
402 Letter from TPR to Robin Ellison and Janet Dawson 27 June 2013; Letter from TPR to the Trustees, 27 July 2011;
Letter from the Trustee to the Pensions Regulator, 9 April 2013
Carillion 57
powers of pension fund trustees are limited and we cannot enforce a demand for money”.404
TPR does have a power to impose contributions, and the Trustee wrote to TPR requesting
“formal intervention” on behalf of scheme members with regard to the 2013 valuation and
recovery plan.405
134. The pension trustees were outgunned in negotiations with directors intent on
paying as little as possible into the pension schemes. Largely powerless, they took a
conciliatory approach with a sponsor who was their only hope of additional money
and, for some of them, their own employer. When it was clear that the company was
refusing to budge an inch, they turned to the Pensions Regulator to intervene.
The Pensions Regulator

135. The Pensions Regulator had an active interest in the Carillion pension schemes for the
last decade of the company’s life. While it was involved in negotiations between Carillion
and the Trustee over the 2008 valuation and recovery plan, this involvement was “less
intense” than its “proactive engagement” on the 2011 valuation.406 Following the July 2017
profit warning, TPR participated in a series of meetings to discuss the company’s deferral
of pension contributions.407
136. Earlier in this report, we found that, having adopted an intransigent approach to
negotiation, Carillion largely got its way in resisting making adequate deficit recovery
contributions following the 2011 valuation. TPR argued, however, that its involvement led
to an increase of £85 million in contributions by Carillion across the recovery period.408
This figure is derived by comparing Carillion’s initial offer of £33.4 million for 16 years
with the final agreed plan, which had contributions rising from £25 million in 2013 to
£42 million by 2022. To what extent TPR were responsible for that increase is unclear.
What is not, though, is that the £85 million was a long way short of the additional £342
million the Trustee was seeking through annual contributions of £65 million. The agreed
plan was also heavily backloaded, with initial contributions of £33 million matching the
company’s offer and steps up in contributions only occurring in later years, when it would
regardless be superseded by a new valuation and recovery plan. Gazelle described the
TPR’s intervention as “disappointing” and expressed bafflement at how Richard Adam
“managed to persuade the Pensions Regulator not to press for a better recovery plan”.409

405 Letter from Robin Ellison to TPR, 9 April 2013
406 Qq653–4 [Mike Birch]
407 Letter from Chief Executive of TPR to the Chair, 26 January 2018
408 Q689 [Mike Birch], Q693, Q711, Q774 [Lesley Titcomb]
409 Letter from Simon Willes, Executive Chairman Gazelle, to the Chair, 29 March 2018, p 7
58 Carillion
Figure 7: 2013 pension deficit recovery plans
£m
70
Trustee
proposal
60
50
Agreed
40 schedule
Company
offer
30
20
10
0
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029
Source: Analysis of Trustee minutes and scheme annual reports
137. If a company is failing to honour its obligations to fund a pension scheme, TPR has
powers, under section 231 of the Pensions Act 2004, to impose a schedule of pension
contributions.410 In 13 years, however, TPR has not used that power once with regard to
any of the thousands of schemes it regulates.411 During the course of the 2011 negotiations,
TPR repeatedly threatened to use its section 231 powers, making reference to them in
correspondence on seven different occasions between June 2013 and March 2014.412
Carillion correctly interpreted these as empty threats. That is no surprise, given TPR’s
evident aversion to actually using its powers to impose a contribution schedule.
138. TPR were also willing to accept recovery plans in the Carillion schemes that were
significantly longer than the average of 7.5 years.413 Carillion and the Trustee’s agreed
recovery plans averaged 16 years in both 2008 and 2011. TPR told us they do not want their
approach to be “perceived as focused too heavily on the length of the recovery plan” and
that longer plans may be appropriate where the trustees and employer have agreed higher
liabilities based on “prudent assumptions”.414 Carillion, however, explicitly rejected more
prudent assumptions, but was still allowed lengthy recovery plans.
139. There is also little evidence that TPR offered any serious challenge to Carillion
over their dividend policy, despite their guidance acknowledging that dividend policy
should be considered as part of a recovery plan.415 In April 2013, TPR confirmed to
both the company and Trustee that they were “not comfortable with recovery plans
411 Letter from the Pensions Regulator to the Chair, 12 March 2018. Over 5,500 schemes are eligible for the PPF.
412 As above.
413 The Pensions Regulator, Scheme funding statistics, June 2017, p 7
414 Letter from the Pensions Regulator to the Chair, 12 March 2018
415 The Pensions Regulator, Code of practice no.3, Funding defined benefits, June 2014, p 3
Carillion 59
increasing whilst dividends are being increased”.416 When questioned about Carillion’s
dividend policy, however, TPR argued Carillion’s ratio of dividend payments to pension
contributions was better than other FTSE companies and that they “cannot and should
not prevent companies paying dividends, if that is the right thing to do”.417 TPR argued
this approach to dividends is in keeping with their statutory objective to minimise any
adverse impact upon the sustainable growth of sponsoring employers in its regulation of
DB funding. This objective, however, only came into force in 2014, after both the 2008 and
2011 valuations. Carillion’s growth did, of course, not transpire to be sustainable.
140. TPR also has statutory objectives to reduce the risk of schemes ending up in the
PPF and to protect member’s benefits. The PPF expects to take on 11 of Carillion’s 13 UK
schemes, meaning the members of those schemes will receive lower pensions than they
were promised. Even paying out lower benefits, the schemes will have a funding shortfall
of around £800 million, which will be absorbed by the PPF and its levy-payers.418 TPR
clearly failed in those objectives.
141. Following Carillion’s liquidation, TPR announced an investigation into the company
which would allow them to seek funding from Carillion and individual board members
for actions which constituted the avoidance of their pension obligations.419 We await the
outcome of that investigation with interest but question the timing. TPR had concerns
about schemes for many years without taking action. There are also no valuable assets left
in the company, and while individual directors were paid handsomely for running the
company into the ground, recouping their bonuses is unlikely to make much of a dent
in an estimated pension liability of £2.6 billion.420 The Work and Pensions Committee’s
2016 report on defined benefit pension schemes found that TPR intervention tended to
be “concentrated at stages when a scheme is in severe stress or has already collapsed”.421
Carillion is the epitome of that.
142. The Pensions Regulator’s feeble response to the underfunding of Carillion’s pension
schemes was a threat to impose a contribution schedule, a power it had never—and has
still never—used. The Regulator congratulated itself on a final agreement which was
exactly what the company asked for the first few years and only incorporated a small
uptick in recovery plan contributions after the next negotiation was due. In reality,
this intervention only served to highlight to both sides quite how unequal the contest
would continue to be.
143. The Pensions Regulator failed in all its objectives regarding the Carillion pension
scheme. Scheme members will receive reduced pensions. The Pension Protection Fund
and its levy payers will pick up their biggest bill ever. Any growth in the company
that resulted from scrimping on pension contributions can hardly be described as
sustainable. Carillion was run so irresponsibly that its pension schemes may well have
ended up in the PPF regardless, but the Regulator should not be spared blame for
416 Carillion single Trustee, Meeting between Trustee representatives and the Pensions Regulator regarding failure
to agree the 2011 valuation, 29 April 2013
417 Q777 [Lesley Titcomb]
418 PPF letter to the Chair, 20 February 2018
419 Letter from Chief Executive of TPR to the Chair, 26 January 2018
420 £2.6 billion is the provisional estimate being made as to the deficit of the schemes on a section 75 basis, which is
the size of the deficit according to how much would be paid to an insurance company to buy-out the liabilities.
Although the section 75 debt will not be met as there are insufficient assets left in the company, that is the
figure that becomes due on insolvency.
421 Work and Pensions Committee, Sixth Report of Session 2016–17, Defined benefit pension schemes, HC 55, p 4
60 Carillion
allowing years of underfunding by the company. Carillion collapsed with net pension
liabilities of around £2.6 billion and little prospect of anything being salvaged from
the wreckage to offset them. Without any sense of irony, the Regulator chose this
moment to launch an investigation to see if Carillion should contribute more money
to its schemes. No action now by TPR will in any way protect pensioners from being
consigned to the PPF.
Financial Reporting Council

144. The Financial Reporting Council (FRC) is the regulator of accountants, auditors and
actuaries. It has a responsibility for maintaining high standards of financial reporting and
auditing, and for pursuing sanctions against those who fall below established professional
standards. It also has a wider mission to promote the integrity of UK business through
its Codes on Corporate Governance and Stewardship. To this end, it seeks to “encourage
companies to produce timely, relevant and trustworthy information about their
performance, prospects and board behaviour”.422 While it can go to the courts to require
revisions to accounts or reports, it generally operates by agreement with the companies
concerned.
145. The FRC can also take legal action in respect of misconduct and breaches of
professional standards, but the UK Corporate Governance Code operates on a “comply or
explain” basis. Directors of companies are not subject to legal action for non-compliance
with the Code and the FRC only has powers of persuasion in promoting adherence to its
principles and guidance. It is principally a matter for shareholders to ensure that the board
complies with the Code and runs the company effectively. Whilst the FRC has no business
in intervening in the day-to-day management of companies to prevent them failing, it
is responsible for maintaining confidence in the system of checks and balances which
underpins the UK business environment by actively pursuing any failings in a timely
manner, not least to act as a deterrent against future poor performance or misconduct.
146. In respect of Carillion, the FRC identified some concerns relating to disclosure of
information as early as 2015. It reviewed the company’s accounts as part of its regular
cycle of corporate reporting reviews, the subject of which are determined by risk profiling
and the identification of priority sectors.423 It contacted the company in relation to twelve
issues, ranging from a lack of clarity in goodwill assumptions to inadequate explanation of
a significant decline in the book to bill ratio.424 Carillion made the requisite disclosures in
subsequent accounts,425 but crucially, the FRC did not follow up by reviewing Carillion’s
accounts the following year, nor by investigating further. The Chief Executive of the
FRC, Stephen Haddrill, told us that, “with hindsight, clearly it would have been better
to have had a further look”,426 but that “we did not think that the lack of disclosure was
symptomatic of something more serious”.427 The FRC had not reviewed the auditing of
the Carillion accounts by KPMG since 2013.428 In spite of subsequent reports of aggressive
422 Financial Reporting Council, About Us, accessed 23 April 2018

423 Letter from FRC to the Chairs, 2 February 2018
424 Letter from FRC to the Chairs, 2 February 2018. The book to bill ratio is the ratio of the number of orders
received to the number billed for.
425 Q31 & Q39 [Stephen Haddrill]
Carillion 61
accounting practices and evidence of the extensive shorting of Carillion stock, the FRC
did not choose to take a closer look at the accounts of Carillion, nor the auditing of them,
until after the first profit warning in July 2017.
147. Shortly after the collapse of Carillion in January 2018, the FRC announced that it had
been “actively monitoring this situation for some time in close consultation with other
relevant regulatory bodies”.429 This was not, however, active monitoring of the accuracy
of disclosure of information by the company; it was instead a review of the previous audit
begun in July 2017.430 The fact that this review was underway could not be made public
until after the company’s collapse due to confidentiality requirements, which Stephen
Haddrill told us he had been trying to get around in some respects and were in need of
review.431
148. On January 29 2018 the FRC announced an investigation into the auditing by
KPMG of Carillion’s financial statements from 2014 onwards under its audit enforcement
procedure.432 On 19 March 2018 it announced specific investigations into the conduct of
Richard Adam and Zafar Khan, in relation to the preparation and approval of Carillion’s
financial statements during this period.433 Under its existing powers, the FRC can only
take action against those with accounting qualifications. Stephen Haddrill told us that
the FRC would conduct these inquiries “as fast as possible” but could not estimate any
timescale.434 The FRC routinely aims to complete such investigations in around two
years.435 Mr Haddrill told us that the FRC’s enforcement team had been increased from
20 to 29 since January 2016, with further expansion planned. While we welcome the
swift announcement of investigations into the audit of Carillion and the conduct of
the Finance Directors responsible for the accounts, we have little faith in the ability
of the FRC to complete important investigations in a timely manner. We recommend
changes to ensure that all directors who exert influence over financial statements can
be investigated and punished as part of the same investigation, not just those with
accounting qualifications.
149. The FRC was far too passive in relation to Carillion’s financial reporting. It should
have followed up its identification of several failings in Carillion’s 2015 accounts with
subsequent monitoring. Its limited intervention in July 2017 clearly failed to deter the
company in persisting with its over-optimistic presentation of financial information.
The FRC was instead happy to walk away after securing box-ticking disclosures of
information. It was timid in challenging Carillion on the inadequate and questionable
nature of the financial information it provided and wholly ineffective in taking to task
the auditors who had responsibility for ensuring their veracity.
429 Financial Reporting Council Statement Regarding Carillion, 15 January 2018

430 Q34 & Q59 [Stephen Haddrill]
431 Qq64–65 [Stephen Haddrill]
2018
433 Financial Reporting Council, Investigation into the preparation and approval of the financial statements of
Carillion plc, 19 March 2018
435 Letter from FRC to the Chairs, 6 July 2016. We note that this period has almost expired in relation to the
investigation into the audit by PwC of the BHS accounts.
62 Carillion
Role of Government
Crown Representative
150. Crown Representatives were introduced in 2011 to “manage the relationship between
Government and each of its strategic suppliers”, and act as a focal point of for their contact
with Government.436 Carillion easily met the definition of a strategic supplier.437 Philip
Green described Carillion’s relationship with its Crown representative as “transparent”
and the “key relationship” it had with Government.438 Richard Howson said he met with
the Crown Representative each quarter and on an ad hoc basis in between.439
151. As part of its management of key strategic suppliers, the Cabinet Office is responsible
for monitoring “publicly available sources for financial information [ … ] including in
particular information about “trigger events” that could potentially lead to the invocation
of financial distress measures in Government contracts”.440 Such information is expected
to be shared with the Crown Representative to discuss with the supplier. A profit warning is
one such trigger event.441 Carillion issued three profit warnings between July and November
2017, yet between August and November 2017 there was no Crown Representative in place
for Carillion, owing to “normal staff turnover”.442 The Government have conceded that
this was a “longer-than-usual delay” as they sought someone with experience of corporate
restructuring rather than company finances.443 Officials maintained that the July profit
warning was a complete surprise to them, but that contact was subsequently stepped up,
and 25 meetings between the Government and Carillion were held between July and
January.444
152. The assignment of a Crown Representative to Carillion served no noticeable

purpose in alerting the Government to potential issues in advance of company’s July
2017 profit warning. The absence of one between August and November 2017 cannot
have increased the Government’s ability to keep itself informed of the direction of the
company during a critical period before its collapse.
Government support
153. Carillion formally approached the Government to ask for financial assistance on 31
December 2017, when it became clear that it was a prerequisite of discussions with existing
lenders about further support.445 Though the Government was by that stage involved in
436 Cabinet Office, Strategic supplier risk management policy, November 2012
437 The Strategic supplier risk management policy defines a strategic supplier as “those suppliers with contracts
across a number of Departments whose revenue from Government according to Government data exceeds
£100m per annum and/or who are deemed significant suppliers to Government in their sector.”
440 Cabinet Office, Strategic supplier risk management policy, November 2012
441 As above.
442 PQ 124135 [on Carillion], 7 March 2018
444 Oral evidence taken before the Liaison Committee on 7 February 2018, HC 770 (2017–19), Q44 [John Manzoni]
First witness statement of Keith Robertson Cochrane, Dated: 15 January 2018 (Not published).
Carillion 63
discussions with Carillion, the only relief they had granted the company was a deferral
of tax liabilities under a HMRC “time to pay arrangement” worth £22 million in October
2017.446
154. Discussions with the Government continued over the first two weeks of 2018. The
company made a further request to HMRC to defer tax liabilities totalling £91 million
across the first four months of 2018. HMRC refused to accept the request at that point,
stating that it would have to be referred to their Commissioners.447 On 13 January 2018,
Philip Green wrote a final letter to the Cabinet Office making the case for Government to
provide guarantees of up to £160 million to the company between January and April 2018.448
Unless this money was provided, Mr Green noted the probability that they would have to
file for insolvency. He claimed it was in Government’s best interest to provide this funding
because they did not have a viable contingency plan in place and allowing Carillion to fall
into liquidation would “come with enormous cost to HM Government, far exceeding the
costs of continued funding for the business”. Mr Green argued that in such a scenario that
there would be “no real ability to manage the widespread loss of employment, operational
continuity, the impact on our customers and suppliers, or (in the extreme) the physical
safety of Carillion employees and the members of the public they serve”.449
155. The Government ignored these claims, aimed at propping up a failing business
model, and rejected the request. Ministers rightly argued that “taxpayers should not, and
will not, bail out a private company for private sector losses or allow rewards for failure”.450
£150 million was made available by the Government to support the insolvency in 2017–18,
as well as an unquantified contingent liability to indemnify the Official Receiver.451
156. In his last-minute ransom note, Philip Green clearly hoped that, faced with the
imminent collapse of Carillion, Government would conclude it was too big to fail. But
the Government was correct not to bail out Carillion. Taxpayer money should not be
used to prop up companies run by such negligent directors. When a company holds 450
contracts with the Government, however, its collapse will inevitably have a signficant
knock-on effects for the public purse. It is simply not possible to transfer all the risk
from the public to the private sector. There is little chance that the £150 million of
taxpayer money made available to support the insolvency will be fully recovered.
Insolvency Service
157. The Minister for the Cabinet Office, the Rt Hon David Lidington MP, told the Liaison
Committee that, in the absence of a Government bailout, there were only two options for
the company:
• a “managed and orderly” liquidation supported by the Official Receiver, part of

the Government’s Insolvency Service; or
446 Carillion plc, Weekly reporting pack, 27 October 2017 (not published)
First witness statement of Keith Robertson Cochrane, Dated: 15 January 2018 (Not published).
448 Carillion plc, Summary of short term funding proposal and status update, 13 January 2018
449 Letter from Philip Green to Permanent Secretary to the Cabinet Office, 13 January 2018
450 HC Deb, 15 January 2018, col 624
451 HM Treasury, Central Government Supply Estimates 2017–18 Supplementary Estimates, February 2018, p 475 and
p 496
64 Carillion
• a “disorderly liquidation” that would have seen mass redundancies, contracts

terminated and the potential loss of public services.452
Sarah Albon, Chief Executive of the Insolvency Service told us that private insolvency
practitioners were unwilling to take on the administration because there was not “certainty
that there was enough money left in the company to pay their costs”.453 At 6.40am on
15 January 2018, the High Court granted a winding-up order for Carillion plc and five
subsidiaries,454 appointing David Chapman, the Official Receiver, as liquidator.455
Box 4: Administration or liquidation
Administration provides for the potential rescue of the company or its business.
Once an administration order is in place, a moratorium protects the company from
legal actions whilst a survival plan or an orderly wind-down of the company’s affairs
is being achieved. Administration allows a company to continue to operate as the
administrator attempts to find a buyer for all or part of the business.
Liquidation does not allow for a potential rescue of the company. The company
stops trading, employees are made redundant, assets are collected and sold and the
proceeds are used to pay company debts. At the end of the liquidation, creditors are
paid as much as possible and the company ceases to exist.456
158. The Official Receiver took on two major roles. First, it had to act as liquidator with
responsibility to sell Carillion’s assets and distribute the returns to creditors.457 Untangling
Carillion’s businesses and contracts required work at an unprecedented scale for the
Insolvency Service.458 This was not helped by the administrative chaos in which Carillion
was left.459 In particular, the Official Receiver found an absence of basic records.460 Second,
and far more unusually, the Official Receiver was required by Government to take over the
running of the wide range of public services provided by Carillion. Given the unique scale
of work required to both manage the insolvency and maintain services,461 the Official
Receiver applied to the High Court at the time of the winding-up petition to appoint
Special Managers to assist him.462 Since the liquidation process began, the Official Receiver
has secured the employment of more than 11,000 former Carillion employees, ensured
the continued operation of public services, and reduced payment times for suppliers
from Carillion’s 120 day terms to 30 days.463 We welcome the work undertaken by the
Official Receiver and his team since the insolvency, although we regret that more than
2,000 Carillion employees have been made redundant.464 The Official Receiver agreed to
452 Oral evidence taken before the Liaison Committee on 7 February 2018, HC 770 (2017–19), Q104 [David Lidington]
453 Q115 [Sarah Albon]. Keith Cochrane confirmed that PwC and EY declined to act as administrators. See High
Court of Justice, In the matter of Carillion plc and in the matter of the Insolvency Act 1986, Exhibit: KC1 - First
witness statement of Keith Robertson Cochrane, Dated: 15 January 2018 (Not published).
454 Carillion Construction Limited, Carillion Services Limited, Planned Maintenance Engineering Limited, Carillion
Integrated Services Limited, and Carillion Services 2006 Limited.
455 Letter from Official Receiver to the Chairs, 5 February 2018
457 HC Deb 15 January 2018, Col 624
459 “Lack of political support doomed Carillion”, Financial Times, 20 January 2018
461 The Official Receiver has been supported by around 3,200 retained Carillion staff (as at 1 May 2018).
462 Insolvency Service, Official Receiver’s Update, 23 April 2018
463 Insolvency Service, Official Receiver’s Update, 23 April 2018; Letter from Insolvency Service to the Chairs, 15
February 2018
464 Insolvency Service, Official Receiver’s Update, 23 April 2018
Carillion 65
support compulsory liquidation, and sought the appointment of Special Managers, in

the best interests of the taxpayer and has sought to achieve the best possible outcome
for employees, suppliers and other creditors.
Special Managers
159. In a letter to us, the Official Receiver explained that due to the speed of the final
collapse of Carillion, he was unable to tender for the Special Managers he needed to support
him. Instead, he made an immediate choice based on the criteria of “a firm that was not
conflicted; which had sufficient resources to undertake this complex liquidation; and that
had some existing knowledge of the Carillion group”.465 It is difficult to envisage how a
company might have knowledge of Carillion and not be conflicted. However, the Official
Receiver decided, and the High Court concurred, that PwC best met these criteria. PwC
had undertaken a range of work for, or relating to Carillion, in the decade leading up to
its collapse.466 Most recently, it had supported the Cabinet Office in its cross-Government
contingency planning for Carillion, up to and including advice on insolvency and the
continuity of public services.467 David Kelly, one of the PwC Special Managers, told us
that he believed Carillion’s work preparing Government for Carillion’s insolvency did not
represent a conflict.468 This is questionable. But the requirement for “sufficient resources”,
which required large numbers of staff to start work on the insolvency within 12 hours of
notification,469 limited the options to the Big Four accountancy firms.470 Despite PwC’s
extensive prior involvement in Carillion, given that KPMG was Carillion’s external
auditor, Deloitte its internal auditor and EY was responsible for its failed rescue plan, it
was certainly credible for the Official Receiver to consider those other Big Four companies
more conflicted. We consider competition and the Big Four in Chapter 3. In applying to
the Court to appoint PwC as Special Managers to the insolvency, the Official Receiver
was seeking to resource a liquidation of exceptional size and complexity as quickly and
effectively as possible from an extremely limited pool.
160. The administrative costs of the liquidation, underwritten by the taxpayer, consist
primarily of the work of the Official Receiver and his team, and of the Special Managers
and other PwC staff that support them. In appointing the Special Managers, the High
Court is also responsible for approving their remuneration by an application from the
Official Receiver from time to time.471 In March 2018 we took evidence from one of the
Special Managers, David Kelly, and sought an update on the costs, and potential costs to
the taxpayer of PwC’s work. Mr Kelly, who is charged out at £865 per hour, told us that
the cost of his firm’s first eight weeks of work would be £20.4 million.472 PwC’s staff were
working at an average hourly rate of £360 per hour, and they had 112 people working on
Carillion in the week prior to their evidence. Mr Kelly was able to give no indication of
the daily cost of the liquidation, no suggestion of the number of PwC staff that would be
required even just a week into the future, and no estimate at all of what PwC’s total fees
would be at the conclusion of their work.473 Across their 15 to 16 workstreams, PwC were
465 Letter from the Official Receiver to the Chairs, 5 February 2018
466 Letter from PwC to the Chairs, 2 February 2018
470 PwC, KPMG, Deloitte and EY.
471 Letter from the Official Receiver to the Chairs, 5 February 2018
472 Q1333 and Q1367 [David Kelly]
473 Qq1332 – 65 [David Kelly]
66 Carillion
unable to suggest any performance indicators for their success, beyond the underpinning
priority of the maintenance of critical Government services.474 While the Official Receiver
and the High Court will be able to review and challenge PwC’s fees,475 we heard little
evidence of challenge or scrutiny of the work of the Special Managers to date. The PPF told
us that under normal insolvency procedures, their role as an unsecured creditor—when
a company collapses with a pension deficit they are often the largest—gives them rights,
which they take-up, to scrutinise the work and fees of the administrators or liquidators.
They have no formal role, however, in scrutinising the work of the Special Managers.476
161. We are concerned that the decision by the court not to set any clear remuneration
terms for PwC’s appointment as Special Managers, and the inability of the appointees
to give any indication of the scale of the liquidation, displays a lack of oversight. We
have seen no reliable estimates of the full administrative costs of the liquidation, and
no evidence that Special Managers, the Official Receiver or the Government have made
any attempt to calculate it. We have also seen no measures of success or accountability
by which the Special Managers are being judged.
162. As advisors to Government and Carillion before its collapse, and as Special
Managers after, PwC benefited regardless of the fate of the company. Without
measurable targets and transparent costs, PwC are continuing to gain from Carillion,
effectively writing their own pay cheque, without adequate scrutiny. When the Official
Receiver requires the support of Special Managers, these companies must not be given
a blank cheque. In the interests of taxpayers and creditors, the Insolvency Service
should set and regularly review spending and performance criteria and provide full
transparency on costs incurred and expected future expense.
Corporate law
Wrongful trading
163. From the tone of the letter sent to the Government on 13 January, it appears that the
Carillion board expected the Government to provide the necessary guarantees to keep
the company afloat. It states that “to date, the board has been able to conclude that, for so
long as key stakeholders (including HM Government) continue to engage meaningfully
in relation to the provision of short term funding and a longer term restructuring, it
is appropriate to continue”.477 We do not have information on the substance of the
conversations between the board and Cabinet Office officials during the preceding weeks,
but it is difficult to believe that the Government would have given an indication that
Carillion could expect long-term support, given the clear policy on private sector bailouts
enunciated by the Minister. It must have been clear by the end of December, if not much
earlier, that an injection of capital from another source was out of the question. Without
Government support, insolvency or liquidation must have seemed inevitable. This calls
into question whether the board was engaged in wrongful trading.
164. Under insolvency law, a director may be guilty of wrongful trading if they knew,
or ought to have known, that there was “no realistic prospect” of the company avoiding
474 Q1345 [David Kelly, Marissa Thomas]
475 As above.
476 Letter from PPF to the Chair, 20 February 2018
477 Letter from Philip Green to Permanent Secretary to the Cabinet Office, 13 January 2018
Carillion 67
liquidation or administration.478 Once an insolvency process becomes inevitable, directors

are obliged to seek to minimise the loss to the company’s creditors. By January 2018, if not
before, it must have been clear to the board that only a bailout from Government could
save the company. It is of course up to the courts to determine, following any application
from the liquidator, whether any offence was committed, and in respect of what period.
Given that, as far as we know, no indications had been given that a bailout would be
forthcoming, and that the board apparently took no steps to minimise the potential
loss to creditors, there must at least be a question as to whether individual directors
could reasonably be accused of wrongful trading.
Directors’ duties
165. Under section 172 of the Companies Act 2006, a director is required to act “in
a way he considers, in good faith, would be most likely to promote the success of the
company for the benefit of its members as a whole”. In doing so, directors are required
to “have regard to” a wide range of considerations, including “the likely consequences of
any decision in the long term”, “the interests of the company’s employees”, the need to
foster the company’s business relationships with suppliers, customers and others”, and
“the desirability of the company maintaining a reputation for high standards of business
conduct”.479 Board minutes from 15 December 2017, exactly one month before the
liquidation, show that Philip Green specifically reminded the board of these duties, and
of previous advice on them from legal advisors.480 However, we have seen that, at the very
least, there are questions to be asked about the extent to which Carillion’s directors had
regard to each of these considerations in running the company. Breaches of these duties
can form the basis of proceedings brought by the Secretary of State for disqualification as
a director under the Disqualification of Directors Act 1986.
166. In Chapter 1, we argued that the business model was based on generating new business
rather than pursuing the long-term strategic interests of the company. We also argued
that managers had little regard to the need to foster business relationships with suppliers:
late payment practices took advantage of smaller suppliers as a matter of practice. This
approach was at odds with any notion of maintaining a reputation for high standards
of business conduct. We have also argued that the board failed to look after the interests
of their employees and former employees by under-funding their pension schemes in
favour of cash elsewhere. In evidence to us, Carillion’s board members did not give the
impression that they were acutely conscious of the wide range of legal duties they had,
nor of the prospect of any penalties arising from failure in this regard. It is difficult
to conclude that they adequately took into account the interests of employees, their
relationships with suppliers and customers, the need for high standards of conduct, or
the long-term sustainability of the company as a whole. Any deterrent effects provided
by section 172 of the Companies Act 2006 were in this case insufficient to affect the
behaviour of directors when the company had a chance of survival. We recommend that
the Insolvency Service, as part of its investigation into the conduct of former directors
of Carillion, includes careful consideration of potential breaches of duties under the
Companies Act as part of their assessment of whether to take action for those breaches
or to recommend to the Secretary of State action for disqualification as a director.
478 Insolvency Act 1986, sections 214(2) and 246ZB(2)

479 Companies Act 2006, section 172(1)
480 Carillion plc, Minutes of the board of directors, 15 December 2017 (not published)
68 Carillion
Box 5: Section 172 of the Companies Act 2006
172 Duty to promote the success of the company.
1. A director of a company must act in the way he considers, in good faith, would be
most likely to promote the success of the company for the benefit of its members as a
whole, and in doing so have regard (amongst other matters) to—
a) the likely consequences of any decision in the long term,
b) the interests of the company’s employees,
c) the need to foster the company’s business relationships with suppliers, customers
and others,
d) the impact of the company’s operations on the community and the environment,
e) the desirability of the company maintaining a reputation for high standards of

business conduct, and
f) the need to act fairly as between members of the company.
2. Where or to the extent that the purposes of the company consist of or include
purposes other than the benefit of its members, subsection (1) has effect as if the
reference to promoting the success of the company for the benefit of its members
were to achieving those purposes.
3. The duty imposed by this section has effect subject to any enactment or rule of law
requiring directors, in certain circumstances, to consider or act in the interests of
creditors of the company.
Winners and losers

167. The consequences of the collapse of Carillion are a familiar story. The company’s
employees, its suppliers, and their employees face at best an uncertain future. Pension
scheme members will see their entitlements cut, their reduced pensions subsidised by
levies on other pension schemes. Shareholders, deceived by public pronouncements
of health, have lost their investments. The faltering reputation of business in the eyes
of the public has taken another hit, to the dismay of business leaders. Meanwhile,
the taxpayer is footing the bill for ensuring that essential public services continue
to operate. But this sorry tale is not without winners. Carillion’s directors took huge
salaries and bonuses which, for all their professed contrition in evidence before us,
they show no sign of relinquishing. The panoply of auditors and other advisors who
looked the other way or who were offered an opportunity for consultancy fees from
a floundering company have been richly compensated. In some cases, they continue
to profit from Carillion after its death. Carillion was not just a failure of a company;
it was a failure of a system of corporate accountability which too often leaves those
responsible at the top—and the ever-present firms that surround them—as winners,
while everyone else loses out. It is to the wider lessons of Carillion’s collapse that we now
turn.
Carillion 69
3 Lessons
Government responsibilities
168. It will always be the case that even well-run companies will sometimes take poor
decisions and be the authors of their own demise; no Government can prevent business
failures. However, there are a number of lessons arising from the collapse of Carillion
which may help to reduce the risks and impact of any future failures. These can be split
into two categories. First, there are lessons for the Government on the way in which
they manage the relationship with a company of such strategic importance. These are
primarily matters for the Public Administration and Constitutional Affairs Committee.
Second, the collapse of Carillion raises a series of questions about the wider business and
pensions environment, for which the Government has ultimate responsibility, albeit much
of it delegated to various regulators. The Government is responsible for ensuring that our
current structure of stakeholder interests and incentives are balanced to best serve the
public interest, and for ensuring that there is effective enforcement when things go wrong.
Some of these issues are outlined below.
Government relationships with strategic suppliers
169. The wider implications of the collapse of Carillion for the way in which the
Government outsources public services are currently the subject of an inquiry by the
Public Administration and Constitutional Affairs Select Committee.481 We therefore do
not explore this whole business model here and look forward to their report. But it is clear
that the role of the Crown Representative is particularly in need of review. We noted in
Chapter 2 the unfortunate absence of a Crown Representative in Carillion at a critical
period, but we question whether the role as it stands is suited to the task of ensuring
that the Government’s and the taxpayers’ interests are being properly served. Where
a company is providing so many key services for Government, it is essential that the
Government can maintain confidence in that company’s ability to deliver for the period it
is contracted to do so. Carillion was a hugely complex company, it operated in the highly
volatile construction and outsourcing services markets, and it entered into long contracts
with uncertain returns. It seems inconceivable that a credible oversight function could
be performed properly by an examination of published accounts and quarterly meetings
with the board. Some individual Crown Representatives are responsible for three separate
strategic suppliers: for example, the Crown Representative for Capita also covers Fujitsu
and Motorola.482 A deeper engagement with the business at all levels is required, to gain
an understanding of the company’s culture (for example, with regard to the timeliness of
payments) and to enable any concerns affecting Government contracts to be detected and
escalated early. While this may be a costlier system, that expenditure should be set against
the actual costs now being incurred by the Government intervention to keep public
services running following Carillion’s collapse. We recommend that the Government
immediately reviews the role and responsibilities of its Crown Representatives in the
light of the Carillion case. This review should consider whether devoting more resources
to liaison with strategic suppliers would offer better value for the taxpayer.
481 Public Administration and Constitutional Affairs Select Committee, Sourcing public services: lessons learned
from the collapse of Carillion inquiry
482 Cabinet Office and Crown Commercial Service, Transparency Data: Crown Representatives and Strategic
Suppliers, accessed 1 May 2018
70 Carillion
Prompt Payment Code
170. The issue of late payments is not limited to Carillion. Ahead of the 2018 Spring
Statement, the FSB published research showing 84% of small firms report being paid
late, with 37% finding that agreed payment terms have lengthened in the past two
years, hampering cash flow. Only 4% see payment terms improving.483 We welcome the
Chancellor’s subsequent call for evidence on late payments in his statement;484 however,
this is little comfort for Carillion’s suppliers and for others whose businesses are put at risk
by late payers. The BEIS Committee will be considering the effectiveness of the Prompt
Payment Code and its enforcement as part of its ongoing inquiry into small businesses
and productivity.485
Corporate Culture
171. Responsibility for the wider business environment and culture is shared among
Government, regulators and, of course, business itself. Business culture is set primarily
by board members, who must act in accordance with duties set out in section 172 of
the Companies Act 2006. Whether or not this law turns out to have been breached by
Carillion’s directors, this case indicates that it is an inadequate influence on corporate
behaviour. There is no realistic chance of shareholders bringing actions against board
members for breach of their duties, given the impact such action would have on the share
price.486 In its report on Corporate Governance, the former BEIS Committee flagged
up the ineffectiveness of section 172, but also recognised the difficulties of achieving
sufficient legal clarity to influence decision making in the boardroom without presenting
an unreasonable degree of legal exposure.487 It advocated more specific and accurate
reporting on the fulfilment of section 172 duties, combined with robust enforcement. The
Government has accepted this recommendation but the necessary regulations required to
implement the changes have still not been laid before Parliament.
172. Whilst the UK has in many respects an enviable system of corporate governance that
helps to attract investment from around the world, too often the high-profile company
failings exposed recently have arisen from rotten corporate cultures. We came across
the systematic exploitation of workers, and inadequate rights that are meant to protect
them, by some companies in our joint work on the Taylor Review of modern working
practices.488 Examples of unjustified executive pay are by no means confined to Carillion,
nor is the poor treatment of suppliers. Effective corporate governance is required to ensure
responsible business ownership and to protect workers: it should not be left to the courts
to clear up the corporate mess.
483 Federation of Small Businesses, Small firms urge Chancellor to speak out on late payment crisis costing economy
billions,accessed 23 April 2018
484 HC Deb, 13 March 2018, col 720
485 Business, Energy and Industrial Strategy Committee, Small businesses and productivity inquiry, accessed 25 April
2018
486 Kiltearn Partners report that they were interested in pursuing legal action against board members in respect of
the liability of issuers in connection with published information, under section 90A and Schedule 10A, Part 2 of
the Financial Services and Markets Act 2000.
487 Business, Energy and Industrial Strategy Committee, Third Report of Session 2016–17, Corporate Governance, HC
702, April 2017, para 25–31
488 Work and Pensions and Business, Energy and Industrial Strategy select committees, A framework for modern
employment, HC 352, November 2017
Carillion 71
173. The Government has already begun to respond to some of these lessons, through
the amendments to directors’ duties we have described, and to insolvency law. The
White Paper on Insolvency and Corporate Governance published in March 2018 directly
addresses some of the issues that our predecessor Committees raised in relation to BHS,
and some relevant to the collapse of Carillion. These include proposals to:
a) Strengthen governance, accountability and internal controls within complex

company structures;
b) Improve transparency around the payment of dividends and the circumstances

in which they can be paid;
c) Improve the awareness of directors about the use of professional independent

advisors;
d) Better protect supply chains and other creditors whilst preserving the primacy
of the interests of shareholders.489
We welcome the Government’s consultation on implementing some technical reforms

arising from recent company collapses. However, we do not believe that these changes,
even if successfully enacted, would have prevented the corporate failures we have seen,
nor tackle some of the systemic weaknesses in our corporate frameworks that enable these
periodic disasters to occur.
174. The BEIS Committee is currently looking at different aspects of corporate governance,
starting with action to improve the gender pay gap and to curb unjustifiably high executive
pay. It plans to revisit the implementation by Government and regulators of some of the
major lessons arising from the demise of BHS, Carillion and other corporate failures and
to look at the extent to which corporate law supports the Government’s industrial strategy,
not least in respect of takeovers.
Investors and stewardship

175. We set out in Chapter 2 the different approaches adopted by major shareholders
and the collective failure of their combined stewardship responsibilities. Under the rules
governing engagement, conversations between investor and company generally occur on
a bilateral basis, other than in situations of corporate or economic stress.490 There are also
requirements preventing the release of information that is not available to other investors
and constraints on acting in concert in the Takeover Code. The BEIS Committee explored
in its report on corporate governance the potential for the UK Investor Forum to provide
a basis for concerted action in limited cases, but noted also the challenges presented by
the trends towards highly dispersed share ownership and passive rather than managed
funds.491 Proper engagement can be resource-intensive and—if the board is unreceptive—
ineffectual, as with Carillion. In this scenario, it can make sense just to divest, or to stay in
but rely on other institutional investors to engage effectively. There is also a strong financial
489 Department for Business, Energy and Industrial Strategy, Insolvency and Corporate Governance, March 2018, p 6
702, April 2017, para 44 - 52
72 Carillion
interest for shareholders not to say anything in public which may have an adverse impact
on the share price. This might help to explain why the press and Parliament sometimes
appear to do a better job of holding company boards to account than shareholders.
176. The potential consequences of what some have characterised “ownerless companies”,
subject to the whims of increasingly short-termist investors, have been subject to much
debate and deserve consideration in the context of the Government’s industrial strategy.
Some of the issues were highlighted in the recent hostile takeover of the supplier GKN by
the turnaround specialist, Melrose. They won the battle for ownership of the company
with promises of higher returns to shareholders, with a business model that envisages
relatively short-term ownership. They were up against a company with a long history
of supplying parts to the automotive and aerospace sectors, including defence-related
components, in the UK and US. Whatever the objectives of the Government’s industrial
strategy to support the development of productive sectors and supply chains in the UK,
there is nothing in law or governance codes that requires investors to do anything other
than look after their own interests. These may or may not align with those of the board,
employees, or the long-term aspirations of the sector and government.
177. The Government has recognised that there is a problem. In its consultation on
Insolvency and Corporate Governance, it includes a section on shareholder responsibilities
in which it argues that “recent corporate failures make it right to ask whether a larger
proportion of institutional investors could be more active and engaged stewards and
whether more could be done to ensure that company directors and their investors
engage constructively.”492 It asks for submissions on what changes could be made to the
Stewardship Code to promote engaged stewardship, including the active monitoring of
risk. It includes as possible options for reform:
• Amendments to the Stewardship Code to provide more detail on how investors

should consider long-term sustainability;
• Promoting better reporting of stewardship outcomes by investors, as opposed to

just reporting on process;
• Establishing a requirement in the Code for asset managers to monitor and

engage on how directors have fulfilled their section 172 requirements;
• The establishment of an expert “stewardship oversight group” to review

significant corporate failings and ensure that lessons are learnt.493
This last option is reactive and of questionable impact, although fully in line with the
tone of regulatory intervention in the corporate realm. It is odd that the Government
itself is inviting submissions on reforms to the Stewardship Code when the FRC is already
committed to an overhaul of that Code later this year and the Government has previously
referred recommendations relating to the Stewardship Code to the FRC review.494
178. In its report on Corporate Governance, the previous BEIS Committee called for the
revised Stewardship Code to provide more explicit guidelines on high quality engagement,
492 Department for Business, Energy and Industrial Strategy, Insolvency and Corporate Governance, March 2018, p
26
493 As above, p 27
494 Business, Energy and Industrial Strategy Committee, Second Special Report of Session 2017–19, Government
Response to Third Report on Corporate Governance, HC 338, September 2017
Carillion 73
requirements for greater transparency in the voting records of asset managers and
an undertaking to call out poor performance on an annual basis.495 Following the
Committee’s report the Government asked the Investment Association to establish a
public register of those companies experiencing a dissenting vote of more than 20% in any
reporting year. This is now established and should help provide greater transparency on
the effectiveness of company engagement with investors. The implementation of the EU
Shareholder Rights Directive should also help to address short-termism and insufficient
oversight of remuneration and related party transactions.496
179. The effective governance of companies and faith in our business culture relies upon
the effective stewardship of major investors. They in turn rely upon accurate financial
reporting and honest, constructive engagement with company boards. The current
Stewardship Code is insufficiently detailed to be effective and, as it exists on a comply
or explain basis, completely unenforceable. It needs some teeth. Proposals for greater
reporting and transparency in terms of investor engagement and voting records are
very welcome and should be taken forward speedily. However, given the incentives
governing shareholder behaviour, and the questionable quality of the financial
information available to them, we are not convinced that these measures in themselves
will be effective in improving engagement, still less in shifting incentives towards
long-term investment and away from the focus on dividend delivery. A more active
and interventionist approach is needed in the forthcoming revision of the Stewardship
Code, including a more visible role for the regulators, principally the Financial
Reporting Council.
The Pensions Regulator

180. Carillion consistently refused to make adequate contributions to its pension schemes,
favouring dividend payments and cash-chasing growth. It was a classic case for The Pension
Regulator to use its powers proactively, under section 231 of the Pensions Act 2004, to
enforce an adequate schedule of contributions. Rt Hon Esther McVey MP, the Secretary
of State for Work and Pensions, concurred with this assessment, telling us that TPR
should have used that power.497 The other major corporate collapse the two Committees
considered together, BHS, was also characterised by long-term underfunding of pension
schemes. But the BHS case was different—the foremost concern in that case was the
dumping of pensions liabilities through the sale of the company. The cases were, though,
united by two key factors. First, a casual corporate disregard for pension obligations. And
second, a pensions regulator unable and unwilling to take adequate steps to ensure that
pensions promises made to staff were met.
181. The Work and Pensions Committee published a report on defined benefit (DB) pension
schemes in December 2016.498 This drew on the joint inquiry into BHS and subsequent
work on the wider sector. The Committee recommended that TPR should regard deficit
recovery plans of over ten years exceptional and that trustees should be given powers
702, April 2017, para 55 and 60.
496 The Shareholder Rights Directive (EU) 2017/828 of the European Parliament and of the Council of 17 May 2017
came into force on 10 June 2017 and is due to be transposed into UK law by 10 June 2019.
497 Q1285 [Esther McVey]
498 Work and Pensions Committee, Sixth report of session 2016–17, Defined benefit pension schemes, HC 55,
December 2016
74 Carillion
to demand timely information from sponsors. It also recommended stronger powers

for TPR in areas such as levying punitive fines to deter avoidance, intervening in major
corporate transactions to ensure pensions are protected, and approving the consolidation
and restructuring of schemes.499 Many of the recommendations of that report were
adopted by the Government in its March 2018 White Paper, Protecting Defined Benefit
Pension Schemes. The Government now intends to consult on the details of the proposed
additional TPR powers.
182. The Work and Pensions Committee has commenced an inquiry into the
implementation of that White Paper.500 The inquiry will be informed by the Committee’s
work on problematic major schemes, which has been primarily conducted through
detailed correspondence and has considered:
• the long-term under-funding of pension schemes apparent in cases such as BHS,

Palmer and Harvey, Monarch and Carillion;
• the suitability of buyers with short investment horizons, including some private
equity firms, to assume responsibility for long term pensions liabilities, in cases
such as GKN, Bernard Matthews and Toys R Us; and
• the potential risk to pension scheme covenants from corporate transactions, in

cases such as Arcadia, Sainsbury’s, Asda, Barclays, Trinity Mirror, Palmer &
Harvey, and BHS.501
In the course of that work, it has become ever more apparent that, while some new powers
are required, the problems in DB pensions regulation are primarily about the regulatory
approach.
183. The Government and TPR recognise this concern and have pledged to act. The
Secretary of State for Work and Pensions stressed that being “ tougher, clearer, quicker”
should be the “key focus” for a Pensions Regulator which would be “on the front foot”.502
TPR told us that, while it accepted that “over the last decade there have been times when
the balance between employer and scheme may not always have been right”, it was “a very
different organisation from five years ago”.503 It is true that TPR has made changes:
• It has different leadership than at the height of its Carillion failings, Lesley
Titcomb having been appointed Chief Executive in 2015;
• TPR has been given additional resources, including an additional £3.5 million in
2017–18 to support frontline casework;
• It has prioritised more proactive regulatory work and has set corporate
performance indicators regarding quicker intervention in DB schemes that are
underfunded or where avoidance is suspected;504
499 As above.
500 Work and Pensions Committee, Defined benefits white paper inquiry
501 Work and Pensions Committee, Defined Benefit Pensions
502 Q1285 and Q1304 [Esther McVey]
503 Letter from TPR to the Chairs, 16 March 2018
504 As above.
Carillion 75
• Its performance measures now incorporate both the proportion of pension

scheme members receiving reduced compensation and the extent to which
schemes are adequately funded;505
• It has undertaken a period of self-analysis and change under the guise of the
TPR Future programme;506 and
• TPR is under more political pressure to focus on its core responsibility of

protecting pensions.507
184. These are positive developments, but what has this meant in practice? We were deeply
concerned by the evidence we received from TPR, which sought to defend the passive
approach they and their predecessors had taken to the Carillion pension schemes. Lesley
Titcomb told us that TPR had secured an improved recovery plan for the schemes having
threatened the use of section 231 powers.508 As we established in Chapter 2, the impact on
the contributions received by the schemes was, at best, minimal. Mike Birch, said, with
regard to section 231, “we do not threaten it when we do not think we would use it, so we
were concerned”.509 However, in 13 years of DB scheme regulation, TPR has issued just
three Warning Notices relating to its section 231 powers, and has not seen a single case
through to imposing a schedule of contributions. In these circumstances, it is difficult to
perceive a threat from TPR of using its section 231 powers as a credible deterrent. We have
little doubt that the likes of Richard Adam took TPR’s posturing with a pinch of salt; other
finance directors with his dismissive approach to pensions obligations would do likewise.
185. The hollowness of TPR threats is not restricted to its powers to impose contributions.
The Pensions Act 2004 established a process of voluntary clearance for corporate
transactions such as sales or mergers. Under this process, TPR can confirm that it does
not regard the transaction to be materially detrimental to the pension scheme.510 It can
therefore provide assurance that it will not subsequently use its powers to combat the
avoidance of pension responsibilities, which could involve legal action and a requirement
to contribute funds, in relation to the transaction.511 Though clearance applications were
common in the early years of TPR’s existence, however, they soon fell rapidly into disuse:
505 The Pensions Regulator, Corporate Plan 2017–2020, April 2017

506 The Pensions Regulator, Protecting Workplace Pensions, accessed 1 May 2018
507 Letter from TPR to the Chair, 13 April 2018
508 Q731 [Lesley Titcomb]
509 Q671 [Mike Birch]
510 This calculation would incorporate any mitigatory measures such as the transfer of assets. It also takes into
account the relative strength of the sponsor covenants before and after the transaction.
511 These are known as “anti-avoidance” or “moral hazard” powers.
76 Carillion
Figure 8: Number of clearance cases handled by The Pensions Regulator
300
275
250
225
200
175
150
125
100
75
50
25
0
2005/06 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17* Apr-Dec
2017
Sources: TPR freedom of information release 2016-02-10: “Numbers of cases of clearance relating to corporate transactions”;
TPR Compliance and enforcement quarterly bulletins from April 2017 onwards; *Committee calculation based on the above.
TPR handled 263 clearance cases in 2005–06, but just 10 in 2016–17. This does not reflect
a marked decline in corporate activity, but a realisation on the part of companies and their
lawyers that threats from TPR are hollow: it is a paper tiger. There is little incentive to seek
clearance to avoid being subject to powers that TPR has very rarely deployed with success.
186. The Government cited Sir Philip Green’s settlement with the BHS pension schemes
as evidence that TPR’s anti-avoidance powers can be effective.512 But that settlement
was driven primarily by considerable public, press and parliamentary pressure. To stand
independently in protection of pension promises, TPR needs to reset its reputation
and demonstrate a marked break with hesitancy. Yet in evidence to us, TPR’s current
leadership defended its empty threats on Carillion, and displayed very little grasp of either
which schemes were likely upcoming problem cases, or what TPR would do to protect
the interests of members of those schemes.513 It is difficult to imagine that any reluctant
scheme sponsor watching would have been cowed by TPR’s alleged new approach.
187. The case of Carillion emphasised that the answer to the failings of pensions
regulation is not simply new powers. The Pensions Regulator, and ultimately
pensioners, would benefit from far harsher sanctions on sponsors who knowingly avoid
their pension responsibilities through corporate transactions. But Carillion’s pension
schemes were not dumped as part of a sudden company sale; they were underfunded over
an extended period in full view of TPR. TPR saw the wholly inadequate recovery plans
and had the opportunity to impose a more appropriate schedule of contributions while
the company was still solvent. Though it warned Carillion that it was prepared to do, it
did not follow through with this ultimately hollow threat. TPR’s bluff has been called
too many times. It has said it will be quicker, bolder and more proactive. It certainly
needs to be. But this will require substantial cultural change in an organisation where
a tentative and apologetic approach is ingrained. We are far from convinced that TPR’s
current leadership is equipped to effect that change. The Work and Pensions Committee
will further consider TPR in its ongoing inquiry into the Defined Benefit Pensions White
Paper.
512 Q1293 [Esther McVey]
513 Q707, Q712, Q718 [Lesley Titcomb]
Carillion 77
Financial Reporting Council

188. The timid and reactive engagement by the Financial Reporting Council with Carillion
underlines the conclusion of the previous BEIS Committee that enforcement of corporate
governance responsibilities is not strong enough. The Committee’s report recommended
a more interventionist approach from an expanded and better-resourced FRC, including
spot checks on companies to act as a deterrent against poor practice, and increased
powers to allow it to initiate legal action against any director. The Government did not
accept these ambitious recommendations. The Secretary of State for Business, Energy and
Industrial Strategy, the Rt Hon Greg Clark MP, has consistently argued that the increased
powers sought by the FRC are unnecessary. He told us that the powers that they need are
there if they act jointly with the Insolvency Service and the Financial Conduct Authority.514
To this end, these regulators have now signed a Memorandum of Understanding (MoU)
to facilitate better use of their different powers when investigating the same company.
Stephen Haddrill was not convinced that this was sufficient, telling us “as we saw before
the financial crisis, regulators can collaborate and then they stop collaborating. I would
like to see some structure around that”.515
189. The present regulatory set up is convoluted and inconsistent. The FRC can pursue
some directors, not others; monitor some reports but not others. There are too many
regulators in the corporate kitchen, each with overlapping responsibilities but slightly
different aims and agendas. Any government will know that it is hard enough to secure
internal agreement, so to expect three or four regulators to cooperate seamlessly and
harmoniously in pursuit of a common goal seems unrealistic and likely to slow down
further already sluggish progress on investigations. Similar problems have been evident
in pensions regulation. In its investigation into the British Steel Pension scheme, the Work
and Pensions Committee found that steelworkers were gravely let down by two slow-
moving and timid regulators—TPR and the FCA—who failed to co-ordinate to protect
their pensions.516
190. The Government announced a review of the FRC on 17 March 2018, to be led by Sir
John Kingman. The Government’s stated objective of the review is to ensure that the FRC
will remain “best in class” and the scope is wide: it aims to “ensure that its structures,
culture and processes; oversight, accountability, and powers; and its impact, resources,
and capacity are fit for the future.”517 It is not clear from the terms of reference or the
evidence from the Secretary of State whether this review is an effort to revamp a body
judged reluctant to throw its weight around, or a vehicle to re-examine the case for tougher
regulation of company directors and further powers for the regulators.518
191. At present, the role of the FRC is confused. It is the professional regulator for
accountants but also responsible for the voluntary codes that guide the behaviour of
directors and investors. It has an apparently little-known role in investigating complaints
514 Q1251 [Greg Clark]

516 Work and Pensions Committee, British Steel Pension Scheme, Sixth Report of Session 2017–19, HC 828, February
2018
517 ‘Government launches review of audit regulator’ Department for Business, Energy and Industrial Strategy Press
Notice, 17 April 2018
518 Oral evidence taken before the Liaison Committee on 7 February 2018, HC 770 (2017–19), Q70 [David Lidington]
78 Carillion
raised relating to its remit by whistle-blowers.519 The quality of audits, as we have seen,
is not of a consistently high standard. The FRC reports that 81% of FTSE 350 audits in
2016 required only limited improvement, meaning that 19% were significantly below
standard: not a ringing endorsement of a high quality and competitive audit market.520
Where standards fall below what is expected, the FRC is far too passive in demanding
improvements and monitoring subsequent performance. It therefore offers no effective
deterrent to sloppy auditing and accounting, and does nothing to dispel views that it is too
sympathetic or close to the accountants and auditors it regulates.
192. The FRC does not appear to acknowledge a link, in terms of its responsibility, between
adequate financial reporting, good corporate behaviour and the survival of companies.
Stephen Haddrill told us that the FRC cannot see inside a company and does not oversee
a system designed to stop companies collapsing. He argued against having powers
to intervene in every company—there was a need for enterprise and must be room for
failure—but advocated stronger powers to “be more transparent about the sorts of things
we are finding.”521 This lack of transparency contributes to its inability to act as a credible
threat to poor reporting practices. Companies can expect nothing more than a quiet word
and encouragement to do better next time. There are signs that the FRC is beginning
to adopt a more proactive approach.522 In April 2018 it invited representatives from the
investment community to form an Investors Advisory Group, to improve engagement
between the FRC and the broad investor community. That month it also announced plans
to enhance the monitoring of the six largest audit firms to, amongst other matters, “avoid
systemic deficiencies within firms’ networks”.523
193. This case is a test of the regulatory system. The Carillion collapse has exposed the
toothlessness of the Financial Reporting Council and its reluctance to use aggressively
the powers that it does have. There are four different regulators engaged, potentially
pursuing action against different directors for related failings in discharging their
duties. We have no confidence in the ability of these regulators, even with a new
Memorandum of Understanding, to work together in a joined-up, rapid and coherent
manner, to apportion blame and impose sanctions in high profile cases.
194. At present, the mindset of the FRC is to be content with apportioning blame
once disaster has struck rather than to proactively challenge companies and flag
issues of concern to avert avoidable business failures in the first place. We welcome
the Government’s review of the FRC’s powers and effectiveness. We believe that the
Government should provide the FRC with the necessary powers to be a much more
aggressive and proactive regulator: one that can publicly question companies about
dubious reporting, investigate allegations of poor practice from whistle-blowers and
others, and can, through the judicious exercise of new powers, provide a sufficient
deterrent against poor boardroom behaviour to drive up confidence in UK business
standards over the long term. Such an approach will require a significant shift in
culture at the FRC itself.
519 According to the FRC’s Annual Report for 2016–17, it received 12 such complaints that year and investigated
further only two.
520 Financial Reporting Council, Developments in audit 2016–17, July 2017, p 5
522 Also, an independent review of the FRC’s enforcement procedures sanctions in October 2017 made some
technical recommendations but made no case for major change.
523 Financial Reporting Council, FRC to enhance monitoring of audit firms, 10 April 2018
Carillion 79
The Big Four

195. Regulation should not be the sole driver of audit standards. As with other markets,
competition between providers should place upwards pressure on the quality of services
and downwards pressure on the price. KPMG’s cursory approval of Carillion’s annual
accounts as external auditor for all 19 years of the company’s existence bore none of the
hallmarks of competition. This is far from an isolated problem: KPMG approved upbeat
assessments of the state of HBOS months before the bank’s spectacular 2008 collapse.
196. KPMG’s close relationship with Carillion was not limited to its long tenure. Richard
Adam, the longstanding Finance Director, and Emma Mercer, who took over that
role, qualified as accountants at the firm.524 This is far from unusual: the Competition
Commission found that two-thirds of chief financial officers of large listed and private
companies were Big Four alumni. Alongside regular audit fees, which averaged £1.5
million per year between 2008 and 2016, KPMG was paid £400,000 per year on average
for additional taxation and assurance services.525
197. Unlike in other markets, incentives to enforce the quality of audit services are skewed.
The primary users of the audited accounts are shareholders and potential shareholders,
who rely on trusted information about public companies.526 The audit is, however, paid
for by the company, and directors can benefit from an auditor who is willing to turn a
blind eye to sharp practice. This is particularly true when an established big-name brand
brings credibility to financial statements. The auditor can expect a steady income for up to
20 consecutive years of audits. For example, in its report on KPMG audits of Pendragon, a
motor retail group, the FRC found that the auditor operated with insufficient independence
from the company.527 The FRC is currently investigating KPMG’s audits of the accounts of
Rolls-Royce Group over a period when the engineering company admits it committed a
series of bribery and corruption offences.528 Murdo Murchison said he would write to the
audit committee chairs of the two other UK listed companies Kiltearn Partners invests
in audited by KPMG, seeking assurances about the quality of that work.529 Euan Sterling,
of Aberdeen Standard Investments, another company that invested in Carillion, said
“reading a set of accounts is like reading a mystery novel”.530
Reviews of competition in the audit market
198. Concerns about independence and audit quality are not restricted to KPMG. Together,
the Big Four global accountancy firms, PwC, KPMG, Deloitte and EY, have dominated
the audits of major UK companies since the implosion in 2002 of Arthur Andersen, the
fifth member of what was then a Big Five. The Big Four oligopoly has been subject to two
official UK competition inquiries:
524 Carillion plc, Annual Report and Accounts 2015, p 42; “Carillion, KPMG face Financial Reporting Council’s
biggest ever inquiry”, Inside Business, 9 February 2018
526 Competition Commission, Statutory audit services for large companies market investigation: summary of report,
October 2013, para 6
527 Financial Reporting Council, Outcome of disciplinary case against KPMG Audit plc, a Member Firm of the ICAEW
and Mr Greg Watts a partner of KPMG LLP, the parent of KPMG Audit plc, and a Member of the ICAEW, 3
February 2015
528 Financial Reporting Council, FRC launch investigation into KPMG in relation to the audit of the financial
statements of Rolls-Royce Group, 4 May 2017
80 Carillion
• in 2005, the Department for Trade and Industry and the FRC commissioned a
study by Oxera, an economics consultancy, into competition and choice in the
UK audit market, which reported in 2006;531 and
• In 2011, following a recommendation by the House of Lords Economic Affairs

Committee, the Office for Fair Trading referred the market for statutory audits
of large companies to the Competition Commission (CC), which reported in
2013.532
199. Both studies found substantial barriers to effective competition. For example, the
prospect of a new firm entering the market should loom as a healthy threat to incumbent
firms. Oxera’s report found that a rival to the Big Four was unlikely to emerge:
Substantial entry is unlikely to be attractive, due to significant barriers,

including the perception bias against mid-tier firms, high costs of entry, a
long payback period for any potential investment, and significant business
risks when competing against the incumbents in the market.533
It concluded that market entry by mid-market firms was only feasible if reputational
bias against smaller firms was reduced and low rates of switching between auditors were
increased.534
200. The Competition Commission found that systemic factors acted against switching.
Tendering for audit was expensive and had uncertain benefits. The incumbent firm had the
opportunity to respond to any dissatisfaction from the audited company. Furthermore, the
incumbent auditors and the audited benefit from mutual understanding and continuity.
The CC concluded that “companies are offered higher prices, lower quality (including less
sceptical audits) and less innovation and differentiation of offering than would be the case
in a well-functioning market”.535
The audit market in 2018
201. The Competition Commission recommended remedial measures to improve

competition in the audit market. These were enacted by a 2014 Order by the Competition
and Markets Authority (CMA), which replaced the Commission.536 FTSE 350 companies
must put their statutory audit out to tender at least every 10 years, and the maximum tenure
is 20 years.537 Measures were also taken to strengthen the accountability of the external
auditor to a company’s audit committee and reduce the influence of management.538
202. There is little sign, however, that those changes have had any substantial impact on
the audit market. In 2016, the Big Four audited 99% of the FTSE 100 and 97% of the FTSE
250.539 This dominance has been almost constant since the demise of Arthur Andersen.
531 Oxera, Competition and choice in the UK audit market, April 2006
532 Competition Commission, Statutory audit services for large companies market investigation, October 2013
533 Oxera, Competition and choice in the UK audit market, April 2006, executive summary page p i
534 As above.
535 Competition Commission, Statutory audit services for large companies market investigation, October 2013, para
34
536 Competition and Markets Authority, CMA finalises audit changes, 26 September 2014
537 Subject to transitional measures
538 Competition and Markets Authority, CMA finalises audit changes, 26 September 2014
539 Financial Reporting Council, Key Facts and Trends in the Accountancy Profession 2017, July 2017, p 45
Carillion 81
If anything, the Big Four has further strengthened its grip. In 2016, it audited 75% of
listed firms outside the FTSE 250 for the first time since 2006. The Secretary of State for
Business, Energy and Industrial Strategy has argued that “increasing capacity in the FTSE
350 audit market would clearly be beneficial”.540
Figure 9: Sustained market domination by the Big Four
% of audits of UK listed companies carried out by Big Four
100 FTSE 100

FTSE 250
80
Other main market
60
40
20
0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
In March 2018, Grant Thornton, the sixth biggest UK firm in terms of audit fee income,541
announced that it would no longer compete for FTSE 350 audit contracts.542 Grant
Thornton explained that “structures in the market” made it “impossible” for the company
to succeed.543
Non-audit services
203. The Big Four offer a wide range of professional services in addition to audit. In
2016, combined Big Four income from audit services was £2 billion. Their income from
non-audit services was £7.9 billion, four times as much. This included £1.1 billion of fees
for non-audit services for audit clients.544 When non-audit fee income is included, the
difference between the Big Four and potential rivals is even more stark.
541 Behind the Big Four and BDO in 2016. Grant Thornton was the fifth biggest firm in terms of total fee income,
incorporating non-audit services.
542 ‘Grant Thornton exits audit market for big UK companies.‘Financial Times, March 29 2018
543 As above.
544 Financial Reporting Council RC, Key Facts and Trends in the Accountancy Profession, July 2017, p 37
82 Carillion
Figure 10: The Big Four and the next four - 2016 fee income
£m
3,500
3,000
2,500
2,000
Non-audit clients
1,500
1,000 Non-audit for audit clients
500
Audit
0
PWC KPMG Deloitte EY BDO Grant RSM Mazars
Thornton
204. It is often reported that audit services are used as a “loss-leader” by accountancy
firms.545 By bidding for audit work at relatively low rates, firms can establish contacts and
reputation in a company or industry and increase their chances of winning lucrative non-
audit consultancy work. This would act as a barrier to smaller and more audit-focused firms
competing on audit pricing. Oxera found the ability to offer additional services on top of
the audit gave the Big Four further advantages over smaller firms.546 The Competition
Commission considered the “bundling” of audit and non-audit services in its inquiry. It
found it could not separately identify profit made from different services, partly because
of the difficulty of attributing costs within broad corporate structures.547 It did not find
sufficient evidence to conclude that bundling harmed competition.548
205. There is, however, a simpler explanation of how the dominance of a few giant audit
and professional services firms can inhibit competition. A company may be unable or
unwilling to appoint one or more members of the Big Four as auditor for a variety of
reasons. For example, a firm may:
• be providing substantial non-audit services to the firm, such as internal audit, or

advice on corporate transactions or tax;
545 See, for example: “Does the big four alumni stifle competition?”, ICAEW Economia, 11 October 2012; “Carillion’s
demise shines a light on an auditor expectation gulf”, City A.M., 31 January 2018; “Audit Reform: The Conflict
Minefield” AccountancyAge, 7 July 2016.
546 Oxera, Competition and choice in the UK audit market, April 2006, p i
10
29
Carillion 83
• have conflicts of interest arising from close links to the finance director or audit
committee chair;
• act as auditor to a major competitor; or
• in the opinion of the company, lack sufficient expertise or have a poor track
record.
When there are only four options, the removal of one, two or even three firms from the
equation leaves very few options left. In both the Oxera and Competition Commission
reviews, financial services industry bodies reported that companies could have no effective
choice of alternative auditor.549
206. This concern was very evident in Carillion. While KPMG provided external audit
services, the company was similarly lucrative for the other Big Four firms. Deloitte
provided internal audit services. EY was drafted in to try to restructure the company, and
one of its partners was seconded onto the Carillion board. In other struggling companies,
the names of the same giant companies appear, albeit often in different roles. As we set
out in Chapter 2, when the Official Receiver needed a large firm to act as Special Manager
to the liquidation of Carillion at short notice in January 2018, it sought a firm that was
“not conflicted”.550 Despite having carried out more than £17 million of work on Carillion
between 2008 and 2018, for the company, its pension schemes, and for government, PwC
was the least conflicted Big Four firm.551 It was appointed Special Manager as a monopoly
supplier, underwritten by the taxpayer. Given that privileged position, it was perhaps
unsurprising that PwC was unable or unwilling to provide an estimate of how long its
work would take, or what the eventual bill would be.552
Time for action
207. Murdo Murchison of Kiltearn Partners said that “there appears to be a lack of
competition in a key part of the financial system, which periodically causes a lot of
other participants in that system a lot of trouble”.553 Stephen Haddrill, Chief Executive
of the FRC, told us that the CMA would “need to review the effectiveness of what they
recommended” regarding competition in the audit market, “and look at it again”.554 The
Secretary of State for Business, Energy and Industrial Strategy, the Rt Hon Greg Clark MP,
said he was “not averse” to reconsidering competition in audit market, as concentrated
markets tended to act against the interests of consumers.555 Similarly, Rt Hon Andrew
Tyrie, incoming Chair of the CMA, said that “something needs to be done” about the
audit market.556
549 Oxera, Competition and choice in the UK audit market, April 2006, p i; Competition Commission, Statutory audit
services for large companies market investigation, October 2013, para 9.33–9.34
550 Letter from David Chapman, Official Receiver, to the Chairs, 5 February 2018
551 Work and Pensions Committee, Committees publish responses from Big Four on Carillion, 13 February 2018.
Note that the original total quoted here for PwC work was £21.1 million. PwC subsequently informed us that out
of a total of £4.6 million that they gave us for work done on the Electric Supply Pension Scheme, only £200,000
related to Carillion. Letter from PwC to the Chairs, 23 February 2018
552 Q1333 and Q1367 [David Kelly]
555 Qq 1258–9 [Greg Clark]
556 Oral evidence taken before the Business, Energy and Industrial Strategy Committee on 24 April 2018 HC 985
(2017–19), Q31 [Andrew Tyrie]
84 Carillion
208. A range of potential policy options could generate more competition in audit. These
include:
• more regular rotation of auditors and competitive tendering for audit contracts;
• breaking up the audit arms of the Big Four to create more firms and increase the
chances of others being able to enter the market;
• splitting audit functions from non-audit services, reducing both the likelihood
of associated conflicts of interest and the potential for cross-subsidisation.
209. The 2013 Competition Commission report considered how the interests of
management and auditors could converge on matters of judgement, against the interests of
shareholders. At times, management had “strong incentives to manage reported financial
performance to accord with expectations and to portray performance in an unduly
favourable light”.557 To maintain lucrative working relationships, auditors had incentives
to “accommodate executive management” in this unwarranted optimism.558 This is the
story of Carillion’s audits. But the weaknesses in regulation and competitive pressure
which not only permitted those failures, but incentivised them to occur, are not restricted
to one company. They are systemic in a market that has been stubbornly resistant to
healthy competition, to the detriment of shareholders and the economy as a whole. That
market is overdue shock treatment.
210. The market for auditing major companies is neatly divvied up among the Big Four
firms. It has long been thus and the prospect of an entrant firm or other competition
shaking up that established order is becoming ever more distant. KPMG’s long and
complacent tenure auditing Carillion was not an isolated failure. It was symptomatic
of a market which works for the members of the oligopoly but fails the wider economy.
Waiting for a more competitive market that promotes quality and trust in audits has
failed. It is time for a radically different approach.
211. The dominant role of the Big Four stretches well beyond statutory audits. They have
been prominent advisors to Governments of all colours and boast an extensive alumni
network which dominates the ranks of regulators and finance directors. They provide a
huge range of professional services to major companies, advising on internal audit, tax
planning, risk, remuneration, corporate governance, controls, regulatory compliance,
mergers and acquisitions, pensions restructuring, business turnaround and insolvency
services. If one member of the oligopoly is a company’s external auditor, the others
can rely on providing other services, at all stages in a company’s life cycle, and rack up
substantial fees whatever the result. The Big Four collectively even benefit from mutual
failure, as one of them will be invariably called in to advise on clearing up the mess left by
the implementation of the previous advisors’ proposed remedy.
212. The lack of meaningful competition creates conflicts of interest at every turn. In
the case of Carillion, KPMG were external auditors, Deloitte were internal auditors
and EY were tasked with turning the company around. Though PwC had variously
advised the company, its pension schemes and the Government on Carillion contracts,
11.23
558 Competition Commission Statutory audit services for large companies market investigation, October 2013, para
26
Carillion 85
it was the least conflicted of the Four. As the Official Receiver searched for a company
to take on the job of Special Manager in the insolvency, the oligopoly had become a
monopoly and PwC could name its price. The economy needs a competitive market for
audit and professional services which engenders trust. Carillion betrayed the market’s
current state as a cosy club incapable of providing the degree of independent challenge
needed.
213. We recommend that the Government refers the statutory audit market to the
Competition and Markets Authority. The terms of reference of that review should
explicitly include consideration of both breaking up the Big Four into more audit firms,
and detaching audit arms from those providing other professional services.
Conclusions
214. The collapse of Carillion has tested the adequacy of the system of checks and
balances on corporate conduct. It has clearly exposed serious flaws, some well-known,
some new. In tracing these, key themes emerge. We have no confidence in our regulators.
FRC and TPR share a passive, reactive mindset and are too timid to make effective
use of the powers they have. They do not seek to influence corporate decision-making
with the realistic threat of intervention. The steps they are beginning to take now, and
extra powers they may receive, will have little impact unless they are accompanied by
a change of culture and outlook. That is what the Government should seek to achieve.
215. The Government has recognised the weaknesses in the regulatory regimes exposed
by Carillion and other corporate failures, but its responses have been cautious, largely
technical, and characterised by seemingly endless consultation. Our select committees
have offered firm and bold recommendations based on exhaustive and compelling
evidence but the Government has lacked the decisiveness or bravery to pursue measures
that could make a significant difference, whether to defined benefit pension schemes,
shareholder engagement, corporate governance or insolvency law. That must change.
Other measures that the Government has taken to improve the business environment,
such as the Prompt Payment Code, have proved wholly ineffective in protecting small
suppliers from an aggressive company and need revisiting.
216. The directors of Carillion, not the Government, are responsible for the collapse
of the company and its consequences. The Government has done a competent job
in clearing up the mess. But successive Governments have nurtured a business
environment and pursued a model of service delivery which made such a collapse, if not
inevitable, then at least a distinct possibility. The Government’s drive for cost savings
can itself come at a price: the cheapest bid is not always the best. Yet companies have
danced to the Government’s tune, focussing on delivering on price, not service; volume
not value. In these circumstances, when swathes of public services are affected, close
monitoring of exposure to risks would seem essential. Yet we have a semi-professional
part-time system that does not provide the necessary degree of insight for Government
to manage risks around service provision and company behaviour. The consequences
of this are clear in the taxpayer being left to foot so much of the bill for the Carillion
clean-up operation.
217. Other issues raised are deep-seated and need much more work. The right alignment
of incentives in the investment chain is a fiendishly difficult balance to strike. The
86 Carillion
economic system is predicated on strong investor engagement, yet the mechanisms

and incentives to support engagement are weak and possibly weakening. The audit
profession is in danger of suffering a crisis in confidence. The FRC and others have their
work cut out to restore trust in the value, purpose and conduct of audits. Competition
has the potential to drive improvements in quality and accountability, but it is currently
severely lacking in a market carved up by four entrenched professional services giants.
There are no easy solutions, but there are some bold ones.
218. Carillion was the most spectacular corporate collapse for some time. The price
will be high, in jobs, businesses, trust and reputation. Most companies are not run with
Carillion’s reckless short-termism, and most company directors are far more concerned
by the wider consequences of their actions than the Carillion board. But that should
not obscure the fact that Carillion became a giant and unsustainable corporate time
bomb in a regulatory and legal environment still in existence today. The individuals
who failed in their responsibilities, in running Carillion and in challenging, advising
or regulating it, were often acting entirely in line with their personal incentives.
Carillion could happen again, and soon. Rather than a source of despair, that can be
an opportunity. The Government can grasp the initiative with an ambitious and wide-
ranging set of reforms that reset our systems of corporate accountability in the long-
term public interest. It would have our support in doing so.
Carillion 87
Conclusions and recommendations

Carillion plc
1. Carillion’s business model was an unsustainable dash for cash. The mystery is not
that it collapsed, but how it kept going for so long. Carillion’s acquisitions lacked
a coherent strategy beyond removing competitors from the market, yet failed to
generate higher margins. Purchases were funded through rising debt and stored
up pensions problems for the future. Similarly, expansions into overseas markets
were driven by optimism rather than any strategic expertise. Carillion’s directors
blamed a few rogue contracts in alien business environments, such as with Msheireb
Properties in Qatar, for the company’s demise. But if they had had their way, they
would have won 13 contracts in that country. The truth is that, in acquisitions, debt
and international expansion, Carillion became increasingly reckless in the pursuit
of growth. In doing so, it had scant regard for long-term sustainability or the impact
on employees, pensioners and suppliers. (Paragraph 14)
2. The perception of Carillion as a healthy and successful company was in no small

part due to its directors’ determination to increase the dividend paid each year,
come what may. Amid a jutting mountain range of volatile financial performance
charts, dividend payments stand out as a generous, reliable and steady incline. In
the company’s final years, directors rewarded themselves and other shareholders by
choosing to pay out more in dividends than the company generated in cash, despite
increased borrowing, low levels of investment and a growing pension deficit. Active
investors have expressed surprise and disappointment that Carillion’s directors
chose short-term gains over the long-term sustainability of the company. We too
can find no justification for this reckless approach. (Paragraph 21)
3. Honouring pension obligations over decades to come was of little interest to

a myopic board who thought of little beyond their next market statement. Their
cash-chasing acquisitions policy meant they acquired pension scheme deficits
alongside companies. Their proposals for funding those deficits were consistently
and resolutely derisory as they blamed financial constraints unrecognisable from
their optimistic market announcements. Meeting the pension promises they had
made to their rank and file staff was far down their list of priorities. This outlook
was epitomised by Richard Adam who, as Finance Director, considered funding the
pension schemes a “waste of money”. (Paragraph 35)
4. Carillion relied on its suppliers to provide materials, services and support across its
contracts, but treated them with contempt. Late payments, the routine quibbling
of invoices, and extended delays across reporting periods were company policy.
Carillion was a signatory of the Government’s Prompt Payment Code, but its
standard payment terms were an extraordinary 120 days. Suppliers could be paid
in 45 days, but had to take a cut for the privilege. This arrangement opened a line of
credit for Carillion, which it used systematically to shore up its fragile balance sheet,
without a care for the balance sheets of its suppliers. (Paragraph 42)
88 Carillion
5. Corporate culture does not emerge overnight. The chronic lack of accountability
and professionalism now evident in Carillion’s governance were failures years in the
making. The board was either negligently ignorant of the rotten culture at Carillion
or complicit in it. (Paragraph 48)
6. Richard Howson, Carillion’s Chief Executive from 2012 until July 2017, was the
figurehead for a business model that was doomed to fail. As the leader of the company,
he may have been confident of his abilities and of the success of the company, but
under him it careered progressively out of control. His misguided self-assurance
obscured an apparent lack of interest in, or understanding of, essential detail, or any
recognition that Carillion was a business crying out for challenge and reform. Right
to the end, he remained confident that he could have saved the company had the
board not finally decided to remove him. Instead, Mr Howson should accept that, as
the longstanding leader who took Carillion to the brink, he was part of the problem
rather than part of the solution. (Paragraph 53)
7. Keith Cochrane was an inside appointment as interim Chief Executive, having

served as a non-executive on the board that exhibited little challenge or insight.
He was unable to convince investors of his ability to lead and rebuild the company.
Action to appoint new leadership from outside Carillion came far too late to have
any chance of saving the company. (Paragraph 56)
8. Non-executives are there to scrutinise executive management. They have a

particularly vital role in challenging risk management and strategy and should act
as a bulwark against reckless executives. Carillion’s NEDs were, however, unable to
provide any remotely convincing evidence of their effective impact. (Paragraph 59)
9. Philip Green was Carillion’s Chairman from 2014 until its liquidation. He interpreted
his role as to be an unquestioning optimist, an outlook he maintained in a delusional,
upbeat assessment of the company’s prospects only days before it began its public
decline. While the company’s senior executives were fired, Mr Green continued to
insist that he was the man to lead a turnaround of the company as head of a “new
leadership team”. Mr Green told us he accepted responsibility for the consequences
of Carillion’s collapse, but that it was not for him to assign culpability. As leader of
the board he was both responsible and culpable. (Paragraph 64)
10. In the years leading up to the company’s collapse, Carillion’s remuneration

committee paid substantially higher salaries and bonuses to senior staff while
financial performance declined. It was the opposite of payment by results. Only
months before the company was forced to admit it was in crisis, the RemCo was
attempting to give executives the chance for bigger bonuses, abandoned only after
pressure from institutional investors. As the company collapsed, the RemCo’s
priority was salary boosts and extra payments to senior leaders in the hope they
wouldn’t flee the company, continuing to ensure those at the top of Carillion would
suffer less from its collapse than the workers and other stakeholders to whom they
had responsibility. (Paragraph 69)
11. Nowhere was the remuneration committee’s lack of challenge more apparent than
in its weak approach to how bonuses could be clawed back in the event of corporate
failures. Not only were the company paying bonuses for poor performance, they
Carillion 89
made sure they couldn’t be taken back, feathering the nests of their colleagues on
the board. The clawback terms agreed in 2015 were so narrow they ruled out a
penny being returned, even when the massive failures that led to the £845 million
write-down were revealed. In September 2017, the remuneration committee briefly
considered asking directors to return their bonuses, but in the system they built
such a move was unenforceable. If they were unable to make a legal case, it is
deeply regrettable that they did not seek to make the moral case for their return.
There is merit in Government and regulators considering a minimum standard
for bonus clawback for all public companies, to promote long-term accountability.
(Paragraph 73)
12. A non-executive director and chair of Carillion’s remuneration committee for

four years, Alison Horner presided over growing salaries and bonuses at the top
of the company as its performance faltered. In her evidence to us, she sought to
justify her approach by pointing to industry standards, the guidance of advisors,
and conversations with shareholders. She failed to demonstrate to us any sense of
challenge to the advice she was given, any concern about the views of stakeholders,
or any regret at the largesse at the top of Carillion. Ms Horner continues to hold the
role of Chief People Officer of Tesco, where she has responsibilities to more than
half a million employees. We hope that, in that post, she will reflect on the lessons
learned from Carillion and her role in its collapse. (Paragraph 75)
13. The Carillion board have maintained that the £845 million provision made in 2017
was the unfortunate result of sudden deteriorations in key contracts between March
and June that year. Such an argument might hold some sway if it was restricted to
one or two main contracts. But their audit committee papers show that at least 18
different contracts had provisions made against them. Problems of this size and scale
do not form overnight. A November 2016 internal peer review of Carillion’s Royal
Liverpool Hospital contract reported it was making a loss. Carillion’s management
overrode that assessment and insisted on a healthy profit margin being assumed
in the 2016 accounts. The difference between those two assessments was around
£53 million, the same loss included for the hospital contract in the July 2017 profit
warning. (Paragraph 95)
14. Carillion used aggressive accounting policies to present a rosy picture to the markets.
Maintaining stated contract margins in the face of evidence that showed they were
optimistic, and accounting for revenue for work that not even been agreed, enabled
it to maintain apparently healthy revenue flows. It used its early payment facility
for suppliers as a credit card, but did not account for it as borrowing. The only cash
supporting its profits was that banked by denying money to suppliers. Whether or
not all this was within the letter of accountancy law, it was intended to deceive
lenders and investors. It was also entirely unsustainable: eventually, Carillion would
need to get the cash in. (Paragraph 96)
15. Emma Mercer is the only Carillion director to emerge from the collapse with any
credit. She demonstrated a willingness to speak the truth and challenge the status
quo, fundamental qualities in a director that were not evident in any of her colleagues.
Her individual actions should be taken into account by official investigations of
the collapse of the company. We hope that her association with Carillion does not
unfairly colour her future career. (Paragraph 100)
90 Carillion
16. Zafar Khan failed to get a grip on Carillion’s aggressive accounting policies
or make any progress in reducing the company’s debt. He took on the role of
Finance Director when the company was already in deep trouble, but he should
not be absolved of responsibility. He signed off the 2016 accounts that presented an
extraordinarily optimistic view of the company’s health, and were soon exposed as
such. (Paragraph 102)
17. Richard Adam, as Finance Director between 2007 and 2016, was the architect of
Carillion’s aggressive accounting policies. He, more than anyone else, would have
been aware of the unsustainability of the company’s approach. His voluntary
departure at the end of 2016 was, for him, perfectly timed. He then sold all his
Carillion shares for £776,000 just before the wheels began very publicly coming off
and their value plummeted. These were the actions of a man who knew exactly
where the company was heading once it was no longer propped up by his accounting
tricks. (Paragraph 105)
18. Carillion’s directors, both executive and non-executive, were optimistic until the
very end of the company. They had built a culture of ever-growing reward behind
the façade of an ever-growing company, focused on their personal profit and success.
Even after the company became insolvent, directors seemed surprised the business
had not survived. (Paragraph 107)
19. Once the business had completely collapsed, Carillion’s directors sought to blame
everyone but themselves for the destruction they caused. Their expressions of regret
offer no comfort for employees, former employees and suppliers who have suffered
because of their failure of leadership. (Paragraph 108)
External checks and balances
20. Major investors in Carillion were unable to exercise sufficient influence on the
board to change its direction of travel. For this the board itself must shoulder most
responsibility. They failed to publish the trustworthy information necessary for
investors who relied on public statements to assess the strength of the company.
Investors who sought to discuss their concerns about management failings with the
board were met with unconvincing and incompetent responses. Investors were left
with little option other than to divest. (Paragraph 113)
21. It is not surprising that the board failed to attract the large injection of capital required
from investors; we are aware of only one who even considered this possibility. In the
absence of strong incentives to intervene, institutional investors acted in a rational
manner, based on the information they had available to them. Resistance to an
increase in bonus opportunities, regrettably, did not extend to direct challenges to
board members. Carillion may have held on to investors temporarily by presenting
its financial situation in an unrealistically rosy hue; had it been more receptive to
the advice of key investors at an earlier stage it may have been able to avert the
darkening clouds that subsequently presaged its collapse. (Paragraph 114)
22. KPMG audited Carillion for 19 years, pocketing £29 million in the process. Not once
during that time did they qualify their audit opinion on the financial statements,
instead signing off the figures put in front of them by the company’s directors. Yet,
Carillion 91
had KPMG been prepared to challenge management, the warning signs were there
in highly questionable assumptions about construction contract revenue and the
intangible asset of goodwill accumulated in historic acquisitions. These assumptions
were fundamental to the picture of corporate health presented in audited annual
accounts. In failing to exercise—and voice—professional scepticism towards
Carillion’s aggressive accounting judgements, KPMG was complicit in them. It
should take its own share of responsibility for the consequences. (Paragraph 124)
23. Deloitte were responsible for advising Carillion’s board on risk management and
financial controls, failings in the business that proved terminal. Deloitte were either
unable to identify effectively to the board the risks associated with their business
practices, unwilling to do so, or too readily ignored them. (Paragraph 125)
24. Carillion’s directors were supported by an array of illustrious advisory firms. Names
such as Slaughter and May, Lazard, Morgan Stanley and EY were brandished by the
board as a badge of credibility. But the appearance of prominent advisors proves
nothing other than the willingness of the board to throw money at a problem and
the willingness of advisory firms to accept generous fees. (Paragraph 129)
25. Advisory firms are not incentivised to act as a check on recklessly run businesses.
A long and lucrative relationship is not secured by unduly rocking the boat. As
Carillion unravelled, some firms gave unwelcome advice. Morgan Stanley explained
that the opportunity to raise equity to keep the company afloat had passed. Carillion
simply marginalised them and sought a second opinion. By the end, a whole suite
of advisors, including an array of law firms, were squeezing fee income out of what
remained of the company. £6.4 million disappeared on the last working day alone as
the directors pleaded for a taxpayer bailout. Chief among the beneficiaries was EY,
paid £10.8 million for its six months of failed turnaround advice as Carillion moved
inexorably towards collapse. (Paragraph 130)
26. The pension trustees were outgunned in negotiations with directors intent on
paying as little as possible into the pension schemes. Largely powerless, they took a
conciliatory approach with a sponsor who was their only hope of additional money
and, for some of them, their own employer. When it was clear that the company
was refusing to budge an inch, they turned to the Pensions Regulator to intervene.
(Paragraph 134)
27. The Pensions Regulator’s feeble response to the underfunding of Carillion’s pension
schemes was a threat to impose a contribution schedule, a power it had never—and
has still never—used. The Regulator congratulated itself on a final agreement which
was exactly what the company asked for the first few years and only incorporated
a small uptick in recovery plan contributions after the next negotiation was due. In
reality, this intervention only served to highlight to both sides quite how unequal
the contest would continue to be. (Paragraph 142)
28. The Pensions Regulator failed in all its objectives regarding the Carillion pension
scheme. Scheme members will receive reduced pensions. The Pension Protection
Fund and its levy payers will pick up their biggest bill ever. Any growth in the
company that resulted from scrimping on pension contributions can hardly
be described as sustainable. Carillion was run so irresponsibly that its pension
92 Carillion
schemes may well have ended up in the PPF regardless, but the Regulator should
not be spared blame for allowing years of underfunding by the company. Carillion
collapsed with net pension liabilities of around £2.6 billion and little prospect of
anything being salvaged from the wreckage to offset them. Without any sense of
irony, the Regulator chose this moment to launch an investigation to see if Carillion
should contribute more money to its schemes. No action now by TPR will in any
way protect pensioners from being consigned to the PPF. (Paragraph 143)
29. While we welcome the swift announcement of investigations into the audit of
Carillion and the conduct of the Finance Directors responsible for the accounts,
we have little faith in the ability of the FRC to complete important investigations
in a timely manner. We recommend changes to ensure that all directors who exert
influence over financial statements can be investigated and punished as part of the
same investigation, not just those with accounting qualifications. (Paragraph 148)
30. The FRC was far too passive in relation to Carillion’s financial reporting. It should
have followed up its identification of several failings in Carillion’s 2015 accounts
with subsequent monitoring. Its limited intervention in July 2017 clearly failed to
deter the company in persisting with its over-optimistic presentation of financial
information. The FRC was instead happy to walk away after securing box-ticking
disclosures of information. It was timid in challenging Carillion on the inadequate
and questionable nature of the financial information it provided and wholly
ineffective in taking to task the auditors who had responsibility for ensuring their
veracity. (Paragraph 149)
31. The assignment of a Crown Representative to Carillion served no noticeable purpose

in alerting the Government to potential issues in advance of company’s July 2017
profit warning. The absence of one between August and November 2017 cannot
have increased the Government’s ability to keep itself informed of the direction of
the company during a critical period before its collapse. (Paragraph 152)
32. In his last-minute ransom note, Philip Green clearly hoped that, faced with the
imminent collapse of Carillion, Government would conclude it was too big to fail.
But the Government was correct not to bail out Carillion. Taxpayer money should
not be used to prop up companies run by such negligent directors. When a company
holds 450 contracts with the Government, however, its collapse will inevitably have
a signficant knock-on effects for the public purse. It is simply not possible to transfer
all the risk from the public to the private sector. There is little chance that the £150
million of taxpayer money made available to support the insolvency will be fully
recovered. (Paragraph 156)
33. The Official Receiver agreed to support compulsory liquidation, and sought the
appointment of Special Managers, in the best interests of the taxpayer and has
sought to achieve the best possible outcome for employees, suppliers and other
creditors. (Paragraph 158)
34. In applying to the Court to appoint PwC as Special Managers to the insolvency,
the Official Receiver was seeking to resource a liquidation of exceptional size and
complexity as quickly and effectively as possible from an extremely limited pool.
(Paragraph 159)
Carillion 93
35. We are concerned that the decision by the court not to set any clear remuneration
terms for PwC’s appointment as Special Managers, and the inability of the appointees
to give any indication of the scale of the liquidation, displays a lack of oversight. We
have seen no reliable estimates of the full administrative costs of the liquidation,
and no evidence that Special Managers, the Official Receiver or the Government
have made any attempt to calculate it. We have also seen no measures of success
or accountability by which the Special Managers are being judged. (Paragraph 161)
36. As advisors to Government and Carillion before its collapse, and as Special Managers
after, PwC benefited regardless of the fate of the company. Without measurable
targets and transparent costs, PwC are continuing to gain from Carillion, effectively
writing their own pay cheque, without adequate scrutiny. When the Official Receiver
requires the support of Special Managers, these companies must not be given a blank
cheque. In the interests of taxpayers and creditors, the Insolvency Service should set
and regularly review spending and performance criteria and provide full transparency
on costs incurred and expected future expense. (Paragraph 162)
37. Given that, as far as we know, no indications had been given that a bailout would be
forthcoming, and that the board apparently took no steps to minimise the potential
loss to creditors, there must at least be a question as to whether individual directors
could reasonably be accused of wrongful trading. (Paragraph 164)
38. In evidence to us, Carillion’s board members did not give the impression that they
were acutely conscious of the wide range of legal duties they had, nor of the prospect
of any penalties arising from failure in this regard. It is difficult to conclude that
they adequately took into account the interests of employees, their relationships
with suppliers and customers, the need for high standards of conduct, or the long-
term sustainability of the company as a whole. Any deterrent effects provided by
section 172 of the Companies Act 2006 were in this case insufficient to affect the
behaviourof directors when the company had a chance of survival. We recommend
that the Insolvency Service, as part of its investigation into the conduct of former
directors of Carillion, includes careful consideration of potential breaches of duties
under the Companies Act as part of their assessment of whether to take action for
those breaches or to recommend to the Secretary of State action for disqualification as
a director. (Paragraph 166)
39. The consequences of the collapse of Carillion are a familiar story. The company’s
employees, its suppliers, and their employees face at best an uncertain future.
Pension scheme members will see their entitlements cut, their reduced pensions
subsidised by levies on other pension schemes. Shareholders, deceived by public
pronouncements of health, have lost their investments. The faltering reputation of
business in the eyes of the public has taken another hit, to the dismay of business
leaders. Meanwhile, the taxpayer is footing the bill for ensuring that essential public
services continue to operate. But this sorry tale is not without winners. Carillion’s
directors took huge salaries and bonuses which, for all their professed contrition
in evidence before us, they show no sign of relinquishing. The panoply of auditors
and other advisors who looked the other way or who were offered an opportunity
for consultancy fees from a floundering company have been richly compensated. In
some cases, they continue to profit from Carillion after its death. Carillion was not
94 Carillion
just a failure of a company; it was a failure of a system of corporate accountability

which too often leaves those responsible at the top—and the ever-present firms that
surround them—as winners, while everyone else loses out. (Paragraph 167)
Lessons
40. We recommend that the Government immediately reviews the role and responsibilities
of its Crown Representatives in the light of the Carillion case. This review should
consider whether devoting more resources to liaison with strategic suppliers would
offer better value for the taxpayer. (Paragraph 169)
41. The current Stewardship Code is insufficiently detailed to be effective and, as it exists
on a comply or explain basis, completely unenforceable. It needs some teeth. Proposals
for greater reporting and transparency in terms of investor engagement and voting
records are very welcome and should be taken forward speedily. However, given
the incentives governing shareholder behaviour, and the questionable quality of the
financial information available to them, we are not convinced that these measures in
themselves will be effective in improving engagement, still less in shifting incentives
towards long-term investment and away from the focus on dividend delivery. A
more active and interventionist approach is needed in the forthcoming revision of
the Stewardship Code, including a more visible role for the regulators, principally
the Financial Reporting Council. (Paragraph 179)
42. The case of Carillion emphasised that the answer to the failings of pensions regulation
is not simply new powers. The Pensions Regulator, and ultimately pensioners, would
benefit from far harsher sanctions on sponsors who knowingly avoid their pension
responsibilities through corporate transactions. But Carillion’s pension schemes
were not dumped as part of a sudden company sale; they were underfunded over an
extended period in full view of TPR. TPR saw the wholly inadequate recovery plans
and had the opportunity to impose a more appropriate schedule of contributions
while the company was still solvent. Though it warned Carillion that it was prepared
to do, it did not follow through with this ultimately hollow threat. TPR’s bluff has
been called too many times. It has said it will be quicker, bolder and more proactive.
It certainly needs to be. But this will require substantial cultural change in an
organisation where a tentative and apologetic approach is ingrained. We are far
from convinced that TPR’s current leadership is equipped to effect that change.
(Paragraph 187)
43. This case is a test of the regulatory system. The Carillion collapse has exposed
the toothlessness of the Financial Reporting Council and its reluctance to use
aggressively the powers that it does have. There are four different regulators
engaged, potentially pursuing action against different directors for related failings
in discharging their duties. We have no confidence in the ability of these regulators,
even with a new Memorandum of Understanding, to work together in a joined-
up, rapid and coherent manner, to apportion blame and impose sanctions in high
profile cases. (Paragraph 193)
44. At present, the mindset of the FRC is to be content with apportioning blame once
disaster has struck rather than to proactively challenge companies and flag issues
of concern to avert avoidable business failures in the first place. We welcome the
Carillion 95
Government’s review of the FRC’s powers and effectiveness. We believe that the
Government should provide the FRC with the necessary powers to be a much more
aggressive and proactive regulator: one that can publicly question companies about
dubious reporting, investigate allegations of poor practice from whistle-blowers and
others, and can, through the judicious exercise of new powers, provide a sufficient
deterrent against poor boardroom behaviour to drive up confidence in UK business
standards over the long term. Such an approach will require a significant shift in
culture at the FRC itself. (Paragraph 194)
45. The market for auditing major companies is neatly divvied up among the Big Four
firms. It has long been thus and the prospect of an entrant firm or other competition
shaking up that established order is becoming ever more distant. KPMG’s long and
complacent tenure auditing Carillion was not an isolated failure. It was symptomatic
of a market which works for the members of the oligopoly but fails the wider
economy. Waiting for a more competitive market that promotes quality and trust in
audits has failed. It is time for a radically different approach. (Paragraph 210)
46. The lack of meaningful competition creates conflicts of interest at every turn. In
the case of Carillion, KPMG were external auditors, Deloitte were internal auditors
and EY were tasked with turning the company around. Though PwC had variously
advised the company, its pension schemes and the Government on Carillion
contracts, it was the least conflicted of the Four. As the Official Receiver searched
for a company to take on the job of Special Manager in the insolvency, the oligopoly
had become a monopoly and PwC could name its price. The economy needs a
competitive market for audit and professional services which engenders trust.
Carillion betrayed the market’s current state as a cosy club incapable of providing
the degree of independent challenge needed. (Paragraph 212)
47. We recommend that the Government refers the statutory audit market to the
Competition and Markets Authority. The terms of reference of that review should
explicitly include consideration of both breaking up the Big Four into more audit
firms, and detaching audit arms from those providing other professional services.
(Paragraph 213)
48. The collapse of Carillion has tested the adequacy of the system of checks and balances
on corporate conduct. It has clearly exposed serious flaws, some well-known, some
new. In tracing these, key themes emerge. We have no confidence in our regulators.
FRC and TPR share a passive, reactive mindset and are too timid to make effective
use of the powers they have. They do not seek to influence corporate decision-
making with the realistic threat of intervention. The steps they are beginning to
take now, and extra powers they may receive, will have little impact unless they
are accompanied by a change of culture and outlook. That is what the Government
should seek to achieve. (Paragraph 214)
49. The Government has recognised the weaknesses in the regulatory regimes exposed
by Carillion and other corporate failures, but its responses have been cautious,
largely technical, and characterised by seemingly endless consultation. Our select
committees have offered firm and bold recommendations based on exhaustive and
compelling evidence but the Government has lacked the decisiveness or bravery to
pursue measures that could make a significant difference, whether to defined benefit
96 Carillion
pension schemes, shareholder engagement, corporate governance or insolvency

law. That must change. Other measures that the Government has taken to improve
the business environment, such as the Prompt Payment Code, have proved wholly
ineffective in protecting small suppliers from an aggressive company and need
revisiting. (Paragraph 215)
50. The directors of Carillion, not the Government, are responsible for the collapse
of the company and its consequences. The Government has done a competent job
in clearing up the mess. But successive Governments have nurtured a business
environment and pursued a model of service delivery which made such a collapse,
if not inevitable, then at least a distinct possibility. The Government’s drive for
cost savings can itself come at a price: the cheapest bid is not always the best. Yet
companies have danced to the Government’s tune, focussing on delivering on price,
not service; volume not value. In these circumstances, when swathes of public
services are affected, close monitoring of exposure to risks would seem essential. Yet
we have a semi-professional part-time system that does not provide the necessary
degree of insight for Government to manage risks around service provision and
company behaviour. The consequences of this are clear in the taxpayer being left to
foot so much of the bill for the Carillion clean-up operation. (Paragraph 216)
51. Other issues raised are deep-seated and need much more work. The right alignment
of incentives in the investment chain is a fiendishly difficult balance to strike. The
economic system is predicated on strong investor engagement, yet the mechanisms
and incentives to support engagement are weak and possibly weakening. The audit
profession is in danger of suffering a crisis in confidence. The FRC and others have
their work cut out to restore trust in the value, purpose and conduct of audits.
Competition has the potential to drive improvements in quality and accountability,
but it is currently severely lacking in a market carved up by four entrenched
professional services giants. There are no easy solutions, but there are some bold
ones. (Paragraph 217)
52. Carillion was the most spectacular corporate collapse for some time. The price
will be high, in jobs, businesses, trust and reputation. Most companies are not run
with Carillion’s reckless short-termism, and most company directors are far more
concerned by the wider consequences of their actions than the Carillion board. But
that should not obscure the fact that Carillion became a giant and unsustainable
corporate time bomb in a regulatory and legal environment still in existence today.
The individuals who failed in their responsibilities, in running Carillion and in
challenging, advising or regulating it, were often acting entirely in line with their
personal incentives. Carillion could happen again, and soon. Rather than a source
of despair, that can be an opportunity. The Government can grasp the initiative with
an ambitious and wide-ranging set of reforms that reset our systems of corporate
accountability in the long-term public interest. It would have our support in doing
so. (Paragraph 218)
Carillion 97
Formal minutes
Wednesday 9 May 2018
Business, Energy and Industrial Strategy Committee

Members present:
Rachel Reeves, in the Chair
Stephen Kerr Antoinette Sandbach

Peter Kyle
Draft Report (Carillion), proposed by the Chair, brought up and read.
Ordered, That the draft Report be read a second time, paragraph by paragraph.
Paragraphs 1 to 218 read and agreed to.
Summary agreed to.
Resolved, That the Report be the Tenth Report of the Committee to the House.
Ordered, That the Chair make the Report to the House.
Ordered, That embargoed copies of the Report be made available, in accordance with the
provisions of Standing Order No. 134.
[Adjourned till Wednesday 9 May at 10.00 am
Work and Pensions Committee

Members present:
Heidi Allen, in the Chair
Ruth George Chris Stephens

Nigel Mills
Draft Report (Carillion), proposed by the Chair, brought up and read.
Ordered, That the draft Report be read a second time, paragraph by paragraph.
Paragraphs 1 to 218 read and agreed to.
Summary agreed to.
Resolved, That the Report be the Twelfth Report of the Committee to the House.
Ordered, That the Chair make the Report to the House.
Ordered, That embargoed copies of the Report be made available, in accordance with the
provisions of Standing Order No. 134.
[Adjourned till Wednesday 9 May at 10.00 am
98 Carillion
Witnesses
The following witnesses gave evidence. Transcripts can be viewed on the inquiry publications
page of the Committee’s website.
Tuesday 30 January 2018 Question numbers
Sarah Albon, Chief Executive Officer, The Insolvency Service and Stephen
Haddrill, Chief Executive Officer, Financial Reporting Council. Q1–144
Chris Martin, Managing Director, Independent Trustee Services Ltd and Robin
Ellison, Chair, Carillion (DB) Pension Trustee Ltd. Q145–217
Tuesday 6 February 2018
Zafar Khan, former Finance Director, Carillion; Keith Cochrane, former Interim
Chief Executive, Carillion; Emma Mercer, former Finance Director, Carillion. Q218–412
Richard Howson, former Chief Executive, Carillion, Philip Green CBE, former
Chairman, Carillion, Richard Adam, former Finance Director, Carillion, and
Alison Horner, former Chair of Remuneration Committee, Carillion. Q413–649
Thursday 22 February 2018
Lesley Titcomb, Chief Executive, The Pensions Regulator; Nicola Parish,

Executive Director of Frontline Regulation, The Pensions Regulator; Mike
Birch, Director of Case Management, The Pensions Regulator. Q650–778
Michael Jones, Internal Audit Partner, Deloitte; Michelle Hinchliffe, Head of
Audit, KPMG; Peter Meehan, Audit Partner, KPMG. Q779–997
Wednesday 7 March 2018
Murdo Murchison, Chief Executive Officer, Kiltearn Partners, Euan Stirling,

Global Head of Stewardship and ESG Investing, Aberdeen Standard
Investments, and Amra Balic, Managing Director, Blackrock. Q998–1130
Andrew Wollaston, Partner, Global Restructuring Leader and Global TAS
Private Equity, Ernst & Young UK, Alan Bloom, Partner, Senior Restructuring,
former UK Restructuring Leader and Global Restructuring Leader, Ernst &
Young UK, and Lee Watson, Partner, Restructuring, Ernst & Young UK. Q1131–1209
Wednesday 21 March 2018
The Rt Hon Greg Clark MP, Secretary of State for Business, Energy and
Industrial Strategy, The Rt Hon Esther McVey MP, Secretary of State for Work
and Pensions, Charlotte Clark, Director, Private Pensions and Arm’s Length
Bodies, Department for Work and Pensions, and Niall Mackenzie, Director,
Infrastructure and Materials, Department for Business, Energy and Industrial
Strategy. Q1210–1314
Marissa Thomas, Partner, Head of Deals, PwC, David Kelly, Partner and
Special Manager, PwC, and Gavin Stoner, Partner, Restructuring and Pensions,
PwC Q1315–1395
Carillion 99
List of Reports from the Business, Energy

and Industrial Strategy Committee during
the current Parliament
All publications from the Committee are available on the publications page of the
Committee’s website. The reference number of the Government’s response to each Report
is printed in brackets after the HC printing number.
Session 2017–19
First Report A framework for modern employment HC 352

Second Report Leaving the EU: implications for the civil nuclear sector HC 378
Third Report The safety of Electrical Goods in the UK HC 503
Fourth Report Pre-legislative scrutiny of the draft Domestic Gas and Electricity HC 517
(Tariff Cap) Bill
Fifth Report The impact of Brexit on the automotive sector HC 379
Sixth Report The impact of Brexit on the aerospace sector HC 380
Seventh Report The impact of Brexit on the processed food and drink sector HC 381
Eighth Report Pre-appointment hearing with the Government’s preferred HC 985
candidate for Chair of the Competition Markets Authority
First Special Industrial Strategy: First Review: Government Response to the HC 337
Report Committee’s Second Report of Session 2016–17
Second Special Corporate governance: Government Response to the HC 338
Report Committee’s Third Report of Session 2016–17
Third Special Apprenticeships: Government Response to the Second Joint HC 450
Report Report of Session 2016–17
Fourth Special Leaving the EU: negotiation priorities for energy and climate HC 550
Report change policy: Government Response to the Committee’s
Fourth Report of Session 2016–17
Fifth Special Pre-legislative scrutiny of the draft Domestic Gas and Electricity HC 865
Report (Tariff Cap) Bill: Government Response to the Committee’s
Fourth Report
Sixth Special Leaving the EU: implications for the civil nuclear sector: HC 881
Report Government response to the Committee’s Second Report
Seventh Special The safety of Electrical Goods in the UK Government Response HC 920
Report to the Committee’s Third Report
Eighth Special A framework for modern employment: Government response HC 966
Report to the Second Report of the Work and Pensions Committee
and First Report of the Business, Energy and Industrial Strategy
Committee of Session 2017–19
100 Carillion
List of Reports from the Work and

Pensions Committee during the current
Parliament
All publications from the Committee are available on the publications page of the
Committee’s website. The reference number of the Government’s response to each Report
is printed in brackets after the HC printing number.
Session 2017–19
First Report Universal Credit: the six week wait HC 336

Second Report A framework for modern employment HC 352
Third Report Protecting pensions against scams: priorities HC 404
for the Financial Guidance and Claims Bill
Fourth Report PIP and ESA assessments: claimant HC 355
experiences
Fifth Report Universal Credit Project Assessment Reviews HC 740
Sixth Report British Steel Pension Scheme HC 828
Seventh Report PIP and ESA assessments HC 829
Eighth Report European Social Fund HC 848

Ninth Report Pensions freedoms HC 917
Tenth Report Assistive technology HC 673
Eleventh Report Universal Credit: supporting self-employment HC 997
Fourteenth Report Appointment of Professor Sir Ian Diamond HC 971
as Chair of the Social Security Advisory
Committee
First Special Report Child Maintenance Service: Government’s HC 354
Response to the Committee’s Fourteenth
Report of Session 2016–17
Second Special Report Self-employment and the gig economy: HC 644
Government Response to the Committee’s
Thirteenth Report of Session 2016–17
Third Special Report Disability employment gap: Government HC 652
Response to the Committee’s Seventh Report
of Session 2016–17
Fourth Special Report Victims of modern slavery: Government HC 672
Response to the Committee’s Twelfth Report
of Session 2016–17
Fifth Special Report Employment Opportunities for Young People: HC 872
Government response to the Committee’s
Ninth Report of Session 2016–17
Carillion 101
Sixth Special Report Protecting pensions against scams: priorities HC 858

for the Financial Guidance and Claims Bill:
Government Response to the Committee’s
Third Report
Seventh Special Report A framework for modern employment: HC 966
Government response to the Second Report
of the Work and Pensions Committee and
First Report of the Business, Energy and
Industrial Strategy Committee
Eight Special Report PIP and ESA assessments: Government HC 986
Response to the Committee’s Seventh Report
Ninth Special Report British Steel Pension Scheme: The Pensions HC 987
Regulator Response to the Committee’s Sixth
Report

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House of Commons

Business, Energy and Industrial

Second Joint report from the Business, Energy

Tenth Report of the Business, Energy and

Twelfth Report of the Work and Pensions

Report, together with formal minutes relating

Ordered by the House of Commons

Rachel Reeves MP (Labour, Leeds West) (Chair)

Committee reports are published on the Committee’s website at

All correspondence should be addressed to the Clerk of the Business, Energy

Rt Hon Frank Field MP (Labour, Birkenhead) (Chair)

Committee reports are published on the publications page of the Committee’s

2 External checks and balances 48

Conclusions and recommendations 87

Carillion and its collapse

• It also owed around £2 billion to its 30,000 suppliers, sub-contractors and

• Carillion’s collapse was sudden and from a publicly-stated position of

Checks and balances

• The company’s non-executive directors failed to scrutinise or challenge

• Carillion’s accounts were systematically manipulated to make optimistic

• Carillion paid other big-name firms as badges of credibility in return for

• The company’s shareholders suffered from an absence of reliable information

• The Government’s Crown Representative system provided little warning of

The lessons of Carillion

There is a danger of a crisis of confidence in the audit profession. KPMG’s audits of

• Carillion’s collapse was sudden and from a publicly-stated position of strength.

• Carillion also owed around £2 billion to its 30,000 suppliers, sub-contractors

Carillion was no ordinary company, and no ordinary collapse.

2. We chose to work together on Carillion, as our predecessor Committees did on BHS,

The company and timeline

Timeline of key events

Alison Horner appointed to board as Non-Executive Director.11

Richard Adam sold entire existing shareholding for £534,000.19

The board agrees a contract provision of £845 million to be

The board concluded that the company was insolvent.45

Government announced they were making £150 million available

2 Carillion plc, Annual Report and Accounts 2006, p 74

Dash for cash

intangible assets purchased is entirely dependent on the appropriateness of the price

Figure 1: Carillion’s total borrowing

Source: Carillion plc Annual Report and Accounts 2005–2017

12. Carillion’s directors attempted to ascribe the company’s collapse to unforeseeable

• the level of available distributable reserves;

• net profits, to provide “dividend cover”,

when determining dividend payments.84

78 Letter from Richard Howson to the Chairs, 21 February 2018

Figure 2: Carillion’s dividend payments

Source: Carillion plc annual reports and accounts 2011–2016

85 Q603 [Richard Adam]

93 Q383 [Keith Cochrane]

105 Letter from Standard Life to the Chairs, 2 February 2018

Box 1: The Pension Protection Fund (PPF)

26. The main Carillion schemes had combined deficits of:

• £327 million on 31 December 2008;

• £617 million on 31 December 2011; and

• £439 million on 31 December 2013.125

29. The 2011 valuation reached an impasse on the same issues:

36. Carillion relied on an extensive network of suppliers to deliver materials, services

Box 2: Vaughan Engineering

2 External checks and balances 48

Conclusions and recommendations 87