Financial Services and Ethics, a case study on Carillion

This paper analyzes the role of financial regulators and ethical principles in the collapse of Carillion, a big construction company shut down case. It discusses the mismanagement of the pension scheme, aggressive accounting, under-bidding, and lack of integrity and transparency in financial reporting. The paper also provides recommendations for preventing such corporate scandals in the future.

Running head: FINANCIAL SERVICES AND ETHICS, A CASE STUDY ON CARILLION
Financial Services and Ethics, a case study on Carillion
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1FINANCIAL SERVICES AND ETHICS, A CASE STUDY ON CARILLION
Executive Summary:
This paper aims at analyzing the case study of Carillion collapse, a big construction company
shut down case, to understand the corporate governance ethics and ethical standards, which
should be maintained in governing a company. Financial accounting firms also play a vital
role in auditing and certifying the financial statements of companies. They also need to
maintain certain professional ethics while delivering their duties. Lastly, the paper concludes
with some valuable recommendations for preventing such a big corporate scandal.

2FINANCIAL SERVICES AND ETHICS, A CASE STUDY ON CARILLION
Table of Contents
Introduction................................................................................................................................3
Establish key information..........................................................................................................3
Ethics that apply to the case.......................................................................................................4
Psychological Egoism............................................................................................................5
Agency Arguments.................................................................................................................5
Ethics that apply to outcomes....................................................................................................6
Precedents and ethical regulations.............................................................................................7
FRC Roles and Responsibilities.................................................................................................8
Degree of impact of different ethical misconducts....................................................................9
External views on the Carillion collapse case............................................................................9
Shareholders...........................................................................................................................9
Customers.............................................................................................................................10
Staff......................................................................................................................................10
Taxpayers.............................................................................................................................10
Recommendations....................................................................................................................10
Conclusion................................................................................................................................11
References................................................................................................................................12

3FINANCIAL SERVICES AND ETHICS, A CASE STUDY ON CARILLION
Introduction
The carillon was one of the largest construction companies in the UK before its
collapse. The company was the second largest construction company in the UK (Plimmer
2018). It had revenues more than 4.4billion sterling pounds (Online-report.com 2019). There
are various weaknesses in the accounting and financial policies of the company that led to the
collapse of the company. The cover of Carillion financial statement dated December 2016
was “making tomorrow a better place” Ironically, within just three months, the company gave
its first profit warning, and it announced 845 sterling pound write-downs and the CEO
resigned (Plimmer 2018). This report paper analyzes the role that financial regulators played
in the collapse of Carillion. The report discusses the role of the bank of England and Pensions
regulator and assesses whether or not the scandal would have been prevented. The CII ethical
model is also used to analyze the ethical situation within the company and makes
recommendations on actions that should be taken to prevent future occurrences.
Establish key information
The collapse of the company resulted in the loss of billions of sterling pounds and
also to the loss of employment. One of the factors that greatly contributed to the collapse of
the company is over-borrowing. Over the eight-year period between December 2009 and Jan
2018, the value of Carillion loans increased from ₤242 million to approximately ₤1.3 billion
(O'Neil 2019). These loans were not used in a productive way by the company and hence it
resulted in the fall of the company. Most of the funds borrowed by the company were not
invested well in profitable opportunities. This is because, while the debt increased by 297%,
the value of long-term assets increased only by 14% (Ford 2018). Aggressive bidding and
accounting also failed the company. Aggressive accounting is the practice where revenue and

4FINANCIAL SERVICES AND ETHICS, A CASE STUDY ON CARILLION
profits are declared based on an optimistic forecast. Most of the times, the revenues and
profits were not as high as expected and hence leading to the failure of the company.
The Bank of England also plays a vital role in the financial industry and market in the
UK (Thomas 2018). One of the functions of BOE is ensuring monetary stability in the
country. Monetary stability relates to maintaining stable prices and confidence in the local
currency. The bank formulates monetary policies and alters the interest rate to achieve
inflation targets (Steer 2018). Another role of BOE is that it is the official custodian of UK
gold reserves. In addition to this, the bank also acts as the lender of last resort to commercial
banks when they suffer a cash shortfall. This helps in maintaining liquidity and confidence in
the financial sector. For example, when a commercial bank is struggling with cash flow
problems, it can take a loan from the Bank of England. The bank of England could have
therefore given financial assistance to the company to prevent it from collapsing.
Ethics that apply to the case
The Pensions Regulator is a non-departmental public body, which is charged with the
responsibility of regulating work-based pension schemes in the UK. The body was created in
the year 2004 under the pensions Act 2004 (Sweet 2018). When investigation on the collapse
of Carillion was done, it was evident that the management of the company mismanaged the
pension scheme. For many years, Carillion forwarded very little money to the pension
scheme and hence leaving many of its workers at the risk of losing out on the pension which
they had worked for many years. It is reported that the companies’ CEO at the time Mr.
Richard Howson disregarded the pension scheme and deemed contributions to the scheme a
waste of money. By the time the company collapsed, there was a ₤800m funding hole in the
pension scheme. The Pensions regulator failed miserably since it failed to use its powers to
force Carillion to increase pension funding despite numerous pleas from the companies’

5FINANCIAL SERVICES AND ETHICS, A CASE STUDY ON CARILLION
trustees. The CEO of the company explained that pressure from the government for the boys
to become more business-friendly resulted to the regulator not intervening to force the
company remit more money to the scheme (Plimmer et al. 2018). Some of the functions of
the Pensions regulator include improving confidence in work-based pensions by protecting
the benefits of scheme members. Another role is reducing the risk of situations that arise
hence leading to compensation claims from the Pension Protection Fund. The other role of
the Pension Regulator is to promote good administration of work-based pension schemes and
maximize employer compliance with employer duties.
Psychological Egoism
The collapse of the Carillion shows that the ethical objection of psychological egoism
is relevant in this particular case. According to this theory of behavior, managers at Carillion
allocated themselves huge bonuses even when the company was not doing well in order to
serve their own personal interests. Managers and directors who were governing the
management of the company were taking decisions on their favor and they thought they are
doing well for the company. As an objection to this concept, they never accounted their
duties and performance and never considered themselves faulty for the failure of the
company.
Agency Arguments
Agency argument requires different agencies to work morally while performing their
duties or delivering their obligations. In the case of Carillion collapse, accounting firms
should have shown their morality while scrutinizing and certifying the financial statement of
the company. In objection to this, they have shifted their obligations to the management of
the company for manipulating the financial records and information.

6FINANCIAL SERVICES AND ETHICS, A CASE STUDY ON CARILLION
From the analyses of the factors that contributed to the collapse of Carillion, it can be
determined that the collapse of the company would have been prevented if all the bodies
tasked with regulating the sector would have played their role well (Ferran 2017). The FCA
should have noticed the exaggeration of financial reports by the management of the company
and intervened to save the situation.
Ethics that apply to outcomes
The CII ethical dilemma model contains a set of ethical principles that guide
professionals working in the financial services sector. The standards are aimed at protecting
the interest of the public. The standards provide members of the Chartered Insurance Institute
with clear principles on how they should conduct themselves. One of the principles is being
open and honest. Professionals should disclose all the necessary information to customers and
shareholder to help them make informed decisions (Ferran 2017). No information should be
concealed from customers or shareholders for whatever purpose. The management of
Carillion should have been honest to the public regarding the accounting methods they were
using (Ford 2018). The board and the CEO should also have been honest and hence remit the
required finances to the pension fund (Ferran 2017). The continued payment of dividends to
shareholders beyond the sustainable point indicates lack of integrity and transparency within
the company. The management of the company gave huge dividends to shareholders instead
of re-investing back the profits to help the company invest and increase its assets. Issuing of
huge dividends by the management of the company would create the perception that the
company was very stable financially and hence attract more investments. The changes to
management pay policy in the year 2016 shows lack of integrity by management of the
company (Plimmer et al. 2018). The management increased their bonuses, which was against
the interest of the shareholders and other significant stakeholders of the company. Another

7FINANCIAL SERVICES AND ETHICS, A CASE STUDY ON CARILLION
ethical issue is that the company did not inform the government of the state of the company.
The government was therefore caught unaware and it had given Carillion many other tenders
without realizing that the company was not in a position to fulfill the contracts. Another case
of lack of integrity for the management of Carillion is that the company overstretched itself
through under-bidding. With, the company found itself experiencing loss, the outsourcing
strategy of the company at some point also went against the interests of the company. Some
of the companies to which Carillion outsourced its services did not perform according to
expectations and hence leading to poor quality work (Scott 2018).
Precedents and ethical regulations
The government set a regulation that companies offering public service are subject to
the Nolan principles. This includes honesty, integrity, accountability, selflessness, openness,
leadership and transparency. Government department boards should also receive information
on the state of the company regularly in order to ensure that the company is still capable of
fulfilling its contractual obligations.
Professionals should also act in the best interests of each client at all times. All
decisions made by Carillion should have been made after a clear understanding of client
needs, priorities, concerns and situations. The board of the company should have realized the
repercussions that the debts accumulated over time would have on the customers and the
shareholders (Ferran 2017). The decision to use aggressive accounting method was also not
made in the best interest of the consumers. This hence resulted in the loss of funds by many
customers who had already paid up for their projects. KPMG the auditor of the compan’y
annual financial report since 1999 did not realize any anomalies in the company’s financial
books of accounts (Johnston 2018). A paper presented at the House of Commons library
briefing paper on the collapse of Carillion shows that from December 2009 to January 2018

8FINANCIAL SERVICES AND ETHICS, A CASE STUDY ON CARILLION
shows that the total debt of the company rose from $242million to 41.3 billion (WARD
2016). Despite financial strength being a major factor principal in risk assessment, the auditor
did not mention it in the report. Another issue of integrity in the financial reporting by the
company is on how profits were presented in the accounts (Mabbett 2018). The company
booked profits before they were realized. Most of the times, the profits attained were less
than what was projected and this resulted to exaggeration of profits (Miyajima 2012). This is
against the ethics of the accounting profession. Some members of the board also sold their
shares after realizing that the company was about to fail and hence they acted unethically
against the legal moral requirement of the profession.
Professionals must also provide high standards of services to their clients. Every
professional in this sector, must treat their customers with utmost respect and holding them in
high esteem (Scott 2018). This helps in developing trust between the organization and the
clients. Carillion employees provided good customer services until the point where the
company started experiencing financial difficulties and hence resulting in the provision of
poor quality services to customers.
Another important ethical principle that is important in this dilemma is that of acting
in the highest ethical standards and integrity (Johnston 2018). Professionals at Carillion must
be trustworthy and behave properly towards the clients and other stakeholder in the business.
No decisions should be made by the company without considering the impact that they will
have on the all stakeholders of the company.
FRC Roles and Responsibilities
The role of the Financial Regulatory Council (FRC) is regulation of accounting, audit
and actuarial professions in the UK. The authority also is responsible for corporate

9FINANCIAL SERVICES AND ETHICS, A CASE STUDY ON CARILLION
governance. The FRC sets strategies and approves all codes and standards relating to
financial reporting. The board of FRC is supported by three governance committees, which
helps it in accomplishing its objectives. The FRC sets standards and codes that govern the
financial reporting standards of companies like Carillion and it should set codes to prevent
forward reporting of profits. Standards set by the FRCs was enough to prevent such types of
scandals, it was the professionals, who did not materialized those standards in practice.
Degree of impact of different ethical misconducts
All those ethical factors affected the management and financial disclosures of the
Carillion Company. Their degree of impact cannot be scored up but it can easily be said that,
the lack of professionalism in the practice of scrutinizing and certifying the financial
statement was the biggest reason behind the scandal.
External views on the Carillion collapse case
The internal and external auditors of Carillion should have raised a red flag on the
activities going on within the company. The ethical issues identified greatly contributed to the
collapse of Carillion and hence it is important that managers act according to set ethical and
moral standards. It affected the interest of external stakeholders to a large extent and their
view about the company can be briefly described as below.
Shareholders
 Shareholders of the company felt that the management of the company had a huge role to
play in the collapse of the company.
 Shareholders felt that the managers should be sued and the institutions that are
responsible for regulations should also be held accountable (Davies 2019).

10FINANCIAL SERVICES AND ETHICS, A CASE STUDY ON CARILLION
Customers
 Some customers especially the government lost huge funds, which they had already paid
to the Carillion (BBC News 2019).
 Most customers sued Carillion for breach of contract and wanted to be compensated.
Staff
 They held the accounting firms to be guilty in the case for hiding material misstatements
and information.
 After the Carillion collapse, staffs and labours promised to crackdown on accounting
firms (The Independent 2019).
Taxpayers
 Taxpayers were hard hit since money belonging to the government was lost when
Carillion collapsed.
 Taxpayers were of the opinion that companies tasked with carrying out government
projects should be highly scrutinized.
 Properties belonging to managers of the company should be auctioned to recover
taxpayers’ money.
Recommendations
FCA should be held accountable for failure to investigate the activities of the
company since there were clear indications that the company was not following guidelines set
by the authority (Plimmer et al. 2018).

11FINANCIAL SERVICES AND ETHICS, A CASE STUDY ON CARILLION
The Pension Regulator should ensure that in future, all organizations remit the
required amount of finances to the pension scheme as required by law and at the right time.
Conclusion
The collapse of Carillion resulted in a very big loss regarding both finances as well as
loss of jobs for thousands of people. The collapse of the Carillion could have been avoided if
major regulatory bodies in the country had played their role. This report discusses the roles of
FCA, The Bank of England the Pensions Regulator and discusses how these roles would have
been applied in this case. The paper also discusses CII ethical principles and applies them to
resolve the ethical dilemma of Carillion. The final section of the paper discusses the
recommendations that should be implemented to prevent future reoccurrence of the event.

12FINANCIAL SERVICES AND ETHICS, A CASE STUDY ON CARILLION
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