Carillion Scandal: UK's Enron

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Corporate Governance
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Corporate governance
Research Essay
“Has the Carillion scandal become the UK's Enron?”
Introduction
Carillion Plc. turned out to be like the UK’s Enron in 2016 after being declared bankrupt
and going down like Enron in 2001 which had also been declared bankrupt due to similar
management lapses. This essay will provide evidence that the Carillion case was similar to UK’s
Enron. It will give the background of Carillion Plc. Corporate governance. To put the Carillion
operations into context, this research paper will highlight the similarities shared with UK’s Enron
which will show how lack of good corporate governance negatively affects businesses. The last
part of this assignment will focus on prudent measure to be taken in ensuring organizations
develop a culture of corporate governance. The ultimate goal is to highlight the positive impacts
of good corporate governance and measures to be taken when corporations are faced with
challenges.

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Corporate Governance
Carillion Plc. was founded in 1999 after delinking its operations from Tarmac
Corporation. Through strategic business decisions and investments, the company grew rapidly, to
have 43,000 staff by 2016. Due to this financial growth Carillion was also listed in the London
Stock Exchange1. The red flags for its eminent downfall were raised in 2015 when the company
started experiencing financial challenges.
The financial challenges facing Carillion were first highlighted by Gregor Kuglitsch who
predicted a change in its profit margins. This was evident in how the suppliers were being paid
and the rise in its debts. The debts had slowed the growth of its shares in the stock exchange.
Investors were concerned with the decline of which by 2015 had depreciated to 19%.
By the time Carillion was going down, it had risen to be the second largest construction
company in the UK. Talks between the construction company and its shareholders including the
government could not save the corporation against liquidation. The main reason why saving
Carillion proved to be a daunting task was because of the various construction undertakings it
was doing for the government. The thought of such a big corporation being liquidated at that
particular time would have greatly affected the economy. The company had more than 20,000
employees and supported other sectors of the economy.
The collapse of Carillion can be attributed to many factors. Key among the issues that
affected the manufacturing corporation was in its corporate governance. This can be linked to its
leadership structure and lack of accountability by the top management. The liquidation process
had ripple effects not only to the employees and investors. There were suppliers who had
1 Carter, David A., Betty J. Simkins, and W. Gary Simpson. "Corporate governance, board diversity, and firm
value." Financial review 38, no. 1 (2003): 33

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Corporate Governance
provided materials and services to the company before its financial challenges began2. Another
set of casualties were a group of pensioners who had invested their retirement funds with
Carillion Plc.
The investigations to the Carillion scandal could not comprehend the reasons the board
did not act promptly. The performance of the Board of Directors of Carillion was put to task over
several lapses in corporate governance issues. The Board comprised of seven directors who
were all legally held liable for the financial scandal that bedeviled Carillion under their watch.
The first notable governance failure was its role in risk management. As the board it was their
role to provide direction and measures to counter the impending financial risk.
The forensic financial audit undertaken in 2016 when the company was facing liquidity
challenges was not comprehensive according to investigations. The reporting of the financial
results was also put into question. The Financial Reporting Council doubted the Financial
Reports presented by the board. Despite some of the directors being qualified accountants, there
was evidence of deliberate attempts to conceal crucial information regarding the corporation’s
true financial statements. Among the areas of financial impropriety was in the various contracts
Carillion had issued. For instance there was a dispute in $1.5 billion contract that was not clearly
captured and explained in the financial reports.
The issues of competitive business strategies in bidding for construction tenders and
contracts were not strategic3. Carillion was misadvised by the board to provide lower bids to
2 Council, ASX Corporate Governance. "Corporate governance principles and recommendations." (2007).
3 Core, John E., Robert W. Holthausen, and David F. Larcker. "Corporate governance, chief executive officer
compensation, and firm performance." Journal of financial economics 51, no. 3 (1999): 371-406

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Corporate Governance
wins lucrative tenders. This was to help them beat other contractors when it came to pricing.
Although their prices were competitive, the manufacturing company found it difficult to deliver
in its contracts. The board should have priced the bidding processes in way that could not be
straining leading to cash flow challenges.
The failure by the board of directors to clearly pin point financial misappropriation can be
solely attributed to two of its directors who were accountants. Unfortunately this is not the case.
The other directors were also held legally liable for negligence. Relying on only the two directors
who were accounts to provide the financial statements was no defense to the other directors.
Prudent corporate governance dictates that all the directors are responsible for the sustainability
of the business. There are very many viable options for non-financial directors to get basic
financial skills for interpretation and scrutinizing financial reports. Some of this includes
executive programs and corporate training for directors.
The 3rd of May 2017 Annual General Meeting held by Carillion was not effective in
communicating its financial position to the stakeholders. Prior to the AGM there was sufficient
evidence to the challenges that Carillion was facing. The AGM provided a very good opportunity
for management to convey the right position of the company to the stakeholders which they did
not. The shareholders could have come up with resolutions and measures to address the
liquidation challenges faced4. It was unfortunate for the company to issue profit warning exactly
four weeks after the AGM.
The profit warning announcement prompted the Financial Conduct Agency to launch
investigations against Carillion based on the timeliness. The reasoning behind the timelines in
4 Daily, Catherine M., Dan R. Dalton, and Albert A. Cannella Jr. "Corporate governance: Decades of dialogue and
data." Academy of management review 28, no. 3 (2003): 371-382

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Corporate Governance
the announcement was to protect the share value of Carillion Plc. The public and shareholders
did not take this announcement kindly. Most of the shareholders felt the company had not been
honest with its operations. Despite the fact that there were liquidation concerns, it was the
responsibility of the board of directors to notify its shareholders. The best alternative that
Carillion could have was employing the services of a competent public relations firm to handle
the crisis.
KPMG who were Carillion auditors since 1999 failed to give Carillion the correct
position concerning their financials. Due to lack of transparency in the 2016 audit report, the
Financial Report Commission petitioned KPMG. Audit is a central part of any sound corporate
governance process. The 2016 audit report raised many questions than answers. The three main
issues the audit report failed to disclosed comprised the pension fund that had been invested into
Carillion by shareholders. The other issue in the audit was the lack of a clear breakdown in the
recurrent expenditure. The last part of the audit which consisted of the true financial position of
the corporation was also not clear in the audit. Against this allegations raised by the Financial
Reporting Commission, KPMG insisted the audit process was transparent and above board.
While the Carillion matter was being debated by Members of Parliament, issues
pertaining to independence of external auditors were put to question. It emerged that KPMG had
benefited enormously to auditing Carillion to a tune of $20 million dollars paid to the audit firm
in consultancy fees5. The same audit firm had also audited the corporation for a period exceeding
5 Denis, Diane K., and John J. McConnell. "International corporate governance." Journal of financial and
quantitative analysis 38, no. 1 (2003): 1-36.

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Corporate Governance
19 years. To compound the matter further, there was no evidence of any competitive bidding or
tendering from KPMG. These issues raised serious concerns on the independence and
impartiality of KPMG as an external auditor. Argument was rife that KPMG could have been
compromised in doing it audit reports. The matter also worsened when it was discovered that
three of the Financial Directors of Carillion were former employees of the said audit firm. All
these allegations point to an audit process that was compromised. In view of integrity and
transparency, both Carillion and KPMG were liable to disclose their past dealings and
affiliations.
Carillion failed in demanding due diligence process from KPMG. Corporate governance
laws are very clear in how external auditors are mandated to operate. Most of the regulations
including transparency and accountability were not followed to the letter.
The role of both internal and external auditors is very important in the Carillion scandal.
Carillion was mandated by the shareholders to ensure there was value for money for services
rendered. During the same period between 2008 and 2016 Carillion also contracted Deloitte to
perform its internal audit processes6. Deloitte was paid a total of $12 million during the said
period of time. The Carillion scandal brought to question the competency and accountability of
the big four audit firms. The evidence also pointed to wastage of shareholders money by hiring
Deloitte for their internal audit. There was no evidence for value of money in both the two
auditing companies.
6 Eng, Li Li, and Yuen Teen Mak. "Corporate governance and voluntary disclosure." Journal of accounting
and public policy22, no. 4 (2003): 325-345.