FCA warns Carillion over misleading reporting

The Financial Conduct Authority (FCA) has warned Carillion and certain of its previous executive directors that it intends to take action over their conduct at the outsourcing company, which collapsed in January 2018

The regulator has issued a warning notice outlining a number of areas in which the FCA says Carillion breached its provisions over the period 1 July 2016 to 10 July 2017.

These include disseminating information that gave false or misleading signals as to the value of its share in circumstances where it ought to have known that the information was false or misleading, and failing to take reasonable care to ensure that its announcement were not misleading, false or deceptive and did not omit anything likely to affect the import of information.

The FCA said it also considered Carillion had failed to take reasonable steps to establish and maintain adequate procedures, systems and controls to enable it to comply with its obligations under the listing rules, and had failed to act with integrity towards its holders and potential holders of its premium listed shares.

According to the warning notice, the FCA considers that the relevant executive directors, whom it does not name, were knowingly concerned in these breaches.

The FCA highlights specific issues of concern where it maintains that Carillion and the relevant executive directors acted recklessly.

These relate to Carillion’s announcements on 7 December 2016, 1 March 2017 and 2 May 2017 which the FCA said were misleading and did not accurately or fully disclose the company’s true financial performance.

They made misleadingly positive statements about Carillion’s financial performance generally and in relation to its UK construction business in particular which did not reflect significant deteriorations in the expected financial performance of that business and the increasing financial risks associated with it.

The FCA said Carillion’s systems, procedures and controls were not sufficiently robust to ensure that contract accounting judgments made it in its UK construction business were appropriately made, recorded and reported internally to the board and the audit committee.

The regular stated that  the relevant executive directors were each aware of the deteriorating expected financial performance within the UK construction business and associated risks. They failed to ensure that those company announcements for which they were responsible accurately and fully reflected these matters.

The FCA also stated that despite their awareness of these deteriorations and increasing risks, the relevant executive directors failed to make the board and audit committee aware of them, resulting in a lack of proper oversight.

A warning notice is not the final decision of the FCA, as the company and individuals have the right to make representations to its regulatory decisions committee.

The FCA has indicated that it is proposing a public censure in relation to Carillion, rather than a financial penalty.

The liquidation of Carillion put dozens of government infrastructure projects at risk, including construction work on several hospitals, and results in thousands of job losses. A the National Audit Office (NAO) report estimated its collapse cost UK taxpayers £148m.

Savage criticism from a joint work and pensions and BEIS select committee on the failure of the Big Four auditors and the regulators to highlight potential  problems in the run up to Carillion’s failure, coupled with the public outcry at the collapse of a major government supplier,  ratcheted up calls for reform of the audit market and its regulation.

In February 2018 the Financial Reporting Council (FRC) announced a probe into KPMG’s auditing of Carillion for the years ended 31 December 2014, 2015 and 2016 and additional audit work carried out during 2017.

It said at the time that the Carillion investigation covered all four audit years and encompasses numerous significant audit areas, including the accounting for construction and services contracts, pensions liabilities, goodwill and going concern

At the end of August this year the FRC delivered its initial report, which was passed to KPMG for its response prior to the regulator’s final decision on whether or not to pursue enforcement proceedings.

Further reading:

FCA warning notice

Pat Sweet |Reporter, Accountancy Daily [2010-2021]

Pat Sweet was the former online reporter at Accountancy Daily and contributor to the monthly Accountancy magazine, pub...

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