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 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 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

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 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.

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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)

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

390 Q462 [Philip Green]

391 Q461 [Philip Green]

392 Carillion plc, Minutes of a meeting of the Board of Directors, 5 July 2017

393 As above.

394 Letter from Morgan Stanley to the Chairs, 21 February 2018

395 As above.