MPs flag up potential EY ‘conflict of interest’ in Carillion inquiry

The Parliamentary joint committee investigating the collapse of Carillion has raised concerns about a potential conflict of interest involving EY, after it discovered the firm was hired by the outsourcer to help with its restructuring at the same time as EY was also asked by one of the company's clients, HS2 Ltd, to assess Carillion’s financial standing

The committee has now written to the transport secretary asking if he was aware that ‘EY was simultaneously advising Carillion on its finances, and HS2 Ltd on the state of Carillion’s finances.’

The issue emerged after the Department of Transport provided evidence to the work and pensions and business, energy and industrial strategy committee, about actions taken to assess the implications of Carillion’s collapse for major government transport projects. HS2 Ltd is the company responsible for delivering the new high speed rail link.

Correspondence to the inquiry from transport secretary Chris Grayling indicated that following Carillion’s July 2017 contract write-down, HS2 Ltd hired EY to ‘carry out due diligence checks’ on Carillion’s financial standing.

Also in July 2017, in response to that same contract write-down and the profit warning, Carillion appointed EY to restructure the company.

In total, EY billed Carillion over £13m for its restructuring work between July 2017 and January 2018. Of this, £10.8m was paid, including £2.5m on the last working day before the company collapsed. Lee Watson, an EY partner, was seconded to the Carillion board of directors as chief transformation officer in September 2017.

In contrast, the firm was paid approximately £29,000 for work assessing Carillion’s financial fitness to continue fulfilling the HS2 public contract.

The committees’ letter to Grayling asks additional questions about when he first became aware that EY was working both on the restructuring and the financial assessment, whether he considered it to be a conflict of interest, and what steps, if any, were taken to mitigate that.

MPs also want to know the dates when EY’s work for HS2 Ltd commenced and completed, and whether the work was the subject of a competitive tender.

In his letter, Grayling said the due diligence tests included liquidity, gearing, interest cover and Dun and Bradsheet thresholds, and that Carillion passed all of these tests.

The select committees now want to know more details about the due diligence tests and how Carillion performed against them, and whether they were repeated following Carillion’s subsequent profit warnings.

The letter asks Grayling ‘Are you satisfied that £29,000 of due diligence was proportionate to the size of the contracts and Carillion’s financial circumstances?’

‘Project Ray’

In its written evidence to the inquiry, EY said ‘Project Ray’, which covered its restructuring work with Carillion, involved 190 members of staff between July 2017 and January 2018 and had three phases.

The first involved assisting Carillion management with improving working capital across the group , recommendations to improve the cash forecasting processes currently in place, and identifying ‘radical cost reduction opportunities as well as short term cost reduction opportunities’, as well as analysing the financial position and considering the options of the pension schemes in the context of the restructuring.

Phase two focused on support to deliver immediate cost reduction opportunities and support defining the future operating model required to release costs and improve operational performance, while phase three covered business planning and forecasting, advice on VAT and PAYE arrears and the partner secondment to the board.

EY said it received fees of approximately £10.8m, with a further £2.3m billed but unpaid. 

The work for HS2 was described by EY as ‘conducting financial tests (pre-qualification questionnaires) on companies bidding for HS2 contracts, including a consortium of which Carillion was one member.’

The firm stated to the inquiry: ‘We were not involved in designing these financial tests and our evaluation of the bidders was limited to reviewing against HS2’s predetermined set of criteria.’

EY’s fee for this project was £197,001, and the firm says of this approximately £29,000 was attributable to Carillion’s role in consortium bids in which it was involved.

Select committee letter to Transport Secretary is here.

Department of Transport correspondence with the committee is here.

EY evidence about engagements with Carillion is here.

Report by Pat Sweet

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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