Carillion

Chris Stephens Excerpts

Thursday 12th July 2018 Commons Chamber

[Rachel Reeves]

My hon. Friend makes an important point. The people who rely on audit are the shareholders, and also the small businesses that supply the company, the people who work there and the pensioners who have saved for their pensions with that business. But they are not the people who employ the auditor, and they are not the people the auditors are accountable to. The auditor is accountable to the audit committee of the business, and it is often appointed by that committee on the advice of the chief financial officer. So, as my hon. Friend says, the incentives are all wrong.

I am pleased to see that our report has prompted some long-overdue soul searching in parts of the audit profession. While the written reactions of the big four accountancy firms to our report differed, they all seem to recognise that there were issues to be addressed. The Institute of Chartered Accountants in England and Wales has recognised this as a watershed moment, and it is leading a review of the audit profession. I hope that that review will propose some radical solutions. We have now referred the audit market for investigation by the Competition and Markets Authority. The new chair of the CMA, Lord Tyrie, was endorsed in his role by the Business, Energy and Industrial Strategy Committee, and he should now demonstrate the same determination he showed in this place leading the Parliamentary Commission on Banking Standards when he looks at the future of the audit market. I am convinced that we have to find a way of making the audit market more competitive and audits themselves more trusted, and of ending the conflicts of interest that can damage the reputation of some of our economy’s major firms.

Behind the company and its auditors and advisers, there are statutory regulators who should have been expected to step in when the business and the audits were seen to be failing. Carillion’s finance directors and auditors were subject to scrutiny by the Financial Reporting Council. Now that the company has collapsed, two former CFOs are under investigation for the preparation of financial statements, and Carillion’s auditors are subject to further scrutiny. During our inquiry, we heard that the FRC had already taken an interest in the situation at Carillion, and that it had concerns about the quality of previous audits by KPMG. However, the regulator had been far too passive. It accepted extra disclosures being made by KPMG and Carillion the following year without any further follow-up action and, although it found repeat issues with KPMG’s wider audit work across other companies, it seemingly took no firm action there either.

Carillion’s huge pension debt was a matter of concern to its pension trustees and the Pensions Regulator, the other regulator involved, but the regulator’s response, again, was feeble. It threatened to impose a contributions schedule and then left the power unused. It sought to negotiate a payment agreement and then agreed precisely with what the company wanted. It launched action only once the company collapsed and then it was too late. Again and again, the Pensions Regulator barked but did not bite. While plugging the £2.6 billion hole in the pension fund would not have saved the company, it could have reduced the largest ever burden on the Pension Protection Fund, which will see pension holders receive less than they have been promised by their company’s scheme. It is telling that none of Carillion’s directors was in the collapsed scheme.

The Committees found serious concerns about the performance of both regulators, including their powers, remit and leadership. If regulators are not working well, employees, investors, suppliers and customers can have little confidence in the businesses in which they are invested. Statutory regulators need to be doing more. Across the work of the Business, Energy and Industrial Strategy Committee, we rarely find ourselves criticising regulators for being too bold. Instead, we keep hearing timid bodies apologising for letting consumers down. That needs to change, and the change should be led from the top.

[Chris Stephens (Glasgow South West) (SNP)]

The hon. Lady is making an excellent speech so far. Does she agree that one of the Committee’s concern was that the companies that were being taken over all had sick pension schemes and that the Pensions Regulator should have been asking serious questions at that point?

[Rachel Reeves]

The hon. Gentleman, who sits on the Work and Pensions Committee, is absolutely right. When Carillion took over companies such as Mowlem, McAlpine and Eaga, it was taking on businesses, yes, but it was also taking on huge pension deficits, which contributed to the problems. However, the business could have decided to address that pension deficit. It was not that nothing could be done. It could have decided to pay money into the pension fund instead of paying out to shareholders and to directors in the form of bonuses, but it decided to do the exact opposite. It made the wrong choices and prioritised the wrong people. It prioritised itself.

The announcement of the Kingman review into the FRC is a welcome start, but the Government must confirm that they are willing to see radical change, including giving regulators more powers if needed and holding them better to account for not using the powers they already have.

The Government, the audit profession and the regulators need to take urgent action. They owe it to the tens of thousands of people affected by Carillion’s collapse and to the untold number of people who could be affected if this is ever allowed to happen again. There are some clear lessons. In contracts, best value is not the same as the lowest price. Outsourcing is not always better than doing things in-house. Privatisation does not mean that the risk or the cost of failure when things go catastrophically wrong are contracted out.

We would all like to think that this is a case of one horrendously badly run company—Carillion was horrendously badly run—but with Interserve, Capita and Mitie all facing difficulties, we would have to be pretty brave to conclude that this is a one-off. We need to restore integrity to British business and the firms that audit them. Six months on, we have regulators reviewing and reviews of the regulators, but we need firmer action on corporate governance, on breaking up cosy cartels and on toughening up sanctions for misconduct. To secure our public services, for jobs, for small business, for contractors and for pensioners, that action is needed and it is needed now.

--- Later in debate ---

[Chris Stephens (Glasgow South West) (SNP)]

First, I thank the hon. Member for Leeds West (Rachel Reeves) for securing this debate. It was a pleasure to be on the joint inquiry, chaired by the hon. Lady and the right hon. Member for Birkenhead (Frank Field). All I can say, having sat on that inquiry, is that the evidence revealed at every session was a real eye-opener. The report stands as one of the most damning indictments of the total failure of a political ideology that assumes that privatisation and outsourcing are always value for money and better than the public sector. The report does not, to use that Glaswegian phrase, miss and hit the wall. If there is one sentence that sums up the entire fiasco, it is this:

“Carillion’s business model was an unsustainable dash for cash. The mystery is not that it collapsed, but how it kept going for so long.”

I have often wondered what quality in someone’s character enables them to collect the eye-watering salaries and bonuses that typify the worst excesses of the corporate world. I can only come to the conclusion that the answer is shamelessness, because it certainly was not competence or caution with public money. However, as the evidence sessions went on, I was clear that it was not just an organisational failure in one company, but a systematic multi-organisational failure.

The key themes revealed were corporate greed, lack of regulation, the big four auditing companies creaming money from struggling companies and pensions scheme stability sacrificed for dividends to shareholders. It was quite astonishing evidence. I asked Carillion’s chief executive, Keith Cochrane, whether dividends to share- holders were a higher priority than employees in the pension scheme. His answer was that he would not look at it that way. The hon. Member for Leeds West went on to say that if parents had two children and the younger child was getting paid less pocket money than the eldest child, and the youngest child said to the mother, “I think I’m a lower priority,” the mother would not necessarily reply, “That is not the way to look at it, dear.” That was some of the astonishing evidence we got from the company.

It was quite clear that the company was ready to dump the pension fund into the Pension Protection Fund; it was very clear on that. Its business model relied on even more acquisitions, rising debt, expansion into new markets and exploitation of suppliers, with a side order of creative accounting and an out-of-control bonus culture. The company was gambling with public assets and finances, always seeking to eliminate any competitors, squeezing subcontractors and suppliers through delayed payments as a matter of course and ignoring its pensions liabilities. Those tactics are straight out of the Robert Maxwell school of risky business. The only element of risk that was carefully managed was ensuring that bonuses could not be recovered in the event of problems arising with the company. Boardroom lifebelts were well and truly secured on this corporate version of the Titanic, with the auditors signing off on their assurances as the SS Carillion steered full speed ahead to the icebergs.

The practice of illustrious advisory firms telling clients exactly what they want to hear in order to secure future business was a feature of the 2008 crash and has continued despite everything. As the report states:

“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.”

The culture of corporate back-scratching and covering for one another has flourished in the absence of any firm regulatory regime. The frustration for those of us with a public sector background is seeing the chickens come home to roost when all along trade unions have been making the case against privatisation, based on well-founded fears of what happens when profit becomes a central feature of public sector delivery. What price public services when those in charge of delivering them operate in an environment of chaos, with contempt for the concept and ethos of public service delivery? The key question is this: how many more wake-up calls do there have to be before people intervene?