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, 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 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)
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 behaviorof 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 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)