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Construction industry holds auditors accountable for Carillion collapse

The construction industry views the collapse of Carillion as a result of aggressive accounting policies and a close relationship with KPMG.

A survey of the supply chain conducted by public sector procurement specialist, Scape Group, finds that 93 per cent of suppliers think the relationship between Carillion and KPMG enabled the outsourcer’s true financial position to be concealed.

Over half of suppliers polled think the accounting policies at Carillion were not discharged in good faith and that the subsequent collapse was facilitated by poor management. Sixty-four per cent of suppliers believe that Carillion’s downfall was due to debt mismanagement, acquisitions and long payment terms, created by a focus on revenue rather than profit.

The construction industry would support a shake-up of the ‘Big Four’ accounting firms, with 57 per cent of suppliers polled saying they thought this was required. The collapse of Carillion in 2018 put thousands of jobs and the supply chain at risk, led to substantial financial losses and brought into question the model of public outsourcing. To reduce and remove conflicts of interest, the Competition and Markets Authority (CMA) has recently called for the division of consultancy and auditing practices. In addition, the CMA suggests that each ‘Big Four’ auditing firm should work with a ‘non-Big Four’ auditor on projects to provide greater oversight and impartiality.

The supply chain would like to see greater oversight too. Three quarters of the suppliers Scape surveyed think the Financial Reporting Council (FRC), which regulates the accountancy sector, was too timid in challenging Carillion’s questionable financial information. Of the Small-Medium Enterprises (SMEs) Scape polled, this figure increased to 83 per cent. Many suppliers (57 per cent) feel that the FRC was ineffective in taking auditors to task for the failings. A review of the FRC has seen plans put forward to tighten the regulation of major audit firms, with a suggestion that the FRC be replaced by a new Audit, Reporting and Governance Authority.

Scape’s research also found the general public and the industry still support the outsourcing model. The public recognises that competition between private firms for public sector contracts, if properly handled, can drive up quality and bring down prices – with less than one in five opposing the use of outsourcing by the public sector.

Frameworks also create significant opportunities for smaller companies that would otherwise stand little to no chance of directly working on larger schemes. Seventy-five per cent of SMEs think they have more opportunities to learn and grow their business by working on projects with reputable framework providers.

Download the full report, After Carillion: The Future of Outsourcing.

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