Rachel Reeves: We cannot have '˜business as usual' after Carillion

THE collapse of Carillion was a devastating blow to the firm's workers, pensioners, suppliers and creditors.
Were you affected by the Carillion collapse?Were you affected by the Carillion collapse?
Were you affected by the Carillion collapse?

As chair of the Business, Energy and Industrial Strategy Committee, I led the inquiry into Carillion with my colleague Frank Field. The findings of our 101-page report on Carillion’s finances, its delusional directors and the failings of the auditors in charge of checking the company’s books were jaw-dropping.

Since our report was published, I have been reflecting on how we ensure lessons are learned and we avoid another disastrous corporate implosion. That task is now urgent.

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Leading up to the crash, the bosses said all was fine at the company that employed 19,000 people in the UK, along with thousands more in its supply chains.Yet, in January, Carillion was declared insolvent with liabilities of almost £7bn and a huge pension deficit – although they still managed to find £79m for a record dividend and huge bonuses for directors shortly before its demise.

Carillion, a notorious late payer, also owed £2bn to 30,000 suppliers, sub-contractors and other creditors, including many businesses in Yorkshire.

Then, there are those who worked for Carillion, some of whom are now searching for new work and others who will never receive their full pensions.

You cannot legislate to prevent business failures or to make clueless directors like those at Carillion perfect company leaders. But the Government and regulators can act so alarm bells are rung far earlier and the impact of failures are less damaging.

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You only have to look at the news about some High Street names as well as other outsourcing companies like Carillion that are in financial trouble to realise it is crucial we learn from the mistakes at Carillion and what happens when real scrutiny is absent.

As our report concluded, there was a rotten corporate culture at the firm. But problems at Carillion went far wider than the bonus-hungry directors’ ill-judged acquisitions and woeful financial management.

The blame must also be laid at the feet of the auditors who were supposed to be checking the books and the regulators who were too passive in tackling the looming disaster.

Like 90 per cent of listed companies in the UK, Carillion was audited by one of the big four auditors – KPMG audited Carillion’s books for the 19 years of its existence. But all of the big accountancy companies – KPMG, along with PwC, EY and Deloitte – were feasting off Carillion fees. This cosy quartet earned £72m from the company in 10 years.

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However, they failed to provide anything like the degree of independent challenge needed.

That’s hardly surprising given that the auditors’ lucrative payments and the promise of future business depended on Carillion being happy with their work. It’s a crazy situation that auditors are answerable to the chief finance officer of a company whose accounts they should be scrutinising and challenging – not the shareholders and employees who rely on auditors to warn them of any problems. Our report recommended the big four auditors should be referred to the Competition and Markets Authority, which should consider whether they should be forcibly broken up to provide more competition in the market and end the dominance of just four firms. I strongly believe that this break-up needs to happen. We need many more firms to increase competition and to ensure that firms face independent challenge over their accounts.

We need real and radical reform – not just to prevent the worst excesses of directors at firms such as Carillion, but also for the financial health of businesses that are vital to our wider economy.

However, the regulators must also accept some blame for what happened at Carillion.

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Accounting watchdogs at the Financial Reporting Council and The Pension Regulator were too timid and had a passive mindset when it came to making proper use of the powers they have.

The Carillion case was a test for them and they failed. Instead of apportioning blame when it is too late, the Financial Reporting Council must challenge companies and sound the warning bell when there are signs of trouble. The Pensions Regulator too failed to play its part in dealing with Carillion’s underfunded pension schemes. We need much tougher sanctions on firms who knowingly shirk their pension responsibilities.

We now need to see cultural change at the regulators and a much more pro-active approach against directors whose actions threaten their workers’ jobs and pensions, as well as suppliers who rely on prompt payments from these massive businesses.

The Government has questions to answer too. The result of its myopic drive for cost savings has too often seen the focus put on the lowest price rather than the quality of services.

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After Carillon, we cannot afford to go back to “business as usual”. This must be a watershed moment when it comes to the checks and balances needed to regulate corporate conduct.

Carillion was a terrible indictment of reckless, short-termist corporate culture at its worst. We need urgent action from the Government to reform our systems of corporate accountability before we have to deal with the social and economic wreckage of another Carillion.

Rachel Reeves is MP for Leeds West and chair of the Business, Energy and Indsutrial Strategy Committee at Parliament.