Carillion

Kelvin Hopkins Excerpts

Thursday 12th July 2018 Commons Chamber

[Rachel Reeves]

I absolutely agree. The directors of the business were not invested in the business. They were not part of the pension fund that collapsed and, as the hon. Gentleman said, Richard Adam, the finance director who oversaw the accounting practices that helped to contribute to the collapse of the company, sold his shares as soon as he could because he knew what we all now know: this business was a failing business that would not be around for much longer.

What we found in Carillion was a board focused on short-term fixes and growing payouts, with no plan for what would happen when the illusion was shattered. Looking at the poor treatment of suppliers when the company was solvent and the trail of destruction the management of the company has caused, I cannot see how Carillion’s directors can make any claim that they had anything other than their own personal interests at heart. In the latest responses that we have published today, Carillion’s directors continue to refuse to demonstrate any culpability for the state the company was in. They have denied that our report is accurate, but have given no evidence whatsoever to support their case.

Let me be clear: the directors of Carillion are culpable for the company’s collapse. They should be ashamed of their performance and they should not be allowed to take the helm of a company ever again.

[Kelvin Hopkins (Luton North) (Ind)]

My hon. Friend is making a first-class speech. Does this not bring to mind the quotation from John Maynard Keynes that capitalism rewards bad behaviour?

[Rachel Reeves]

I thank my hon. Friend for that intervention. Bad behaviour was being rewarded at Carillion, but the people being rewarded were not the people investing in the business, or the people working for it and saving for their pensions with the business; the people being rewarded were those making the decisions about where the money went—making the decisions about whether to plug the pensions deficit or pay dividends to shareholders. Those are the people who should be paying the price, but under the system we have today, they walk away with their bonuses and their dividends intact. It is other people—the people who are not responsible and did not make the decisions but who did the work—who are paying the price, and that is what needs to be reformed.

When corporate governance is failing, there should be checks and balances, but our inquiry found a regime that was not up to the job of doing that. The first line of defence should have been those who were auditing and advising the company. KPMG, Carillion’s auditors for 19 years, continued to give a clean bill of health to the business, even just a few months before the July 2017 announcements that heralded its swift but painful decline. In the report we have published today, KPMG’s chairman, Bill Michael, denies any issues with the clean bill of health that his company gave to Carillion just months before it began to publicly collapse. Mr Michael is burying his head in the sand, which reflects badly on his understanding of the impact of Carillion on the reputation of his company, and of the future of audit as an industry. The status quo is simply not sustainable, and the big audit firms must understand that and respond to it.

Competition in industry is supposed to drive up quality and bring down costs. It is not working in the audit market, where a cosy club of four hoover up huge fees before, during and after any corporate failure, yet their audits and accounts, as one investor put it to our Committee, read like a mystery novel—a fiction, with the reader searching for scant clues on what is really happening. The big four firms audit all the FTSE 100 businesses and all but a handful of the FTSE 350 top businesses, as well as providing them with advice on a range of services. There are conflicts of interest at every turn, and it was left to the least conflicted, PwC, to clear up the mess during the liquidation process.

[Kelvin Hopkins]

My hon. Friend is making an important point about the audit companies. Is it not a major problem that they are ostensibly there to represent the shareholders’ interests against those of the managers but that they are actually employed by the managers, and that if they do not give the managers what they want, they will not get the next contract?

[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.

--- Later in debate ---

[Kelvin Hopkins (Luton North) (Ind)]

I cannot possibly deliver my speech in three minutes, but I will do my best.

I am pleased to be able to speak in this significant debate on an issue that marks a turning point in Britain’s politics and economics. The collapse of Carillion should see the end of a huge policy mistake—the dogma-driven tragedy of the privatising, outsourcing and marketising of our public services. It is now time to accept that mistake, and to begin the process of rebuilding the public utilities and public services established in the early post-war decades that underpinned the enormous social advances achieved in those times.

The neoliberal economic model has brought political and economic instability, slower and erratic growth rates, and greater inequality—a world where the mega-wealthy and unconstrained private banking and corporate power have prospered at the expense of the rest of us. The death knell for neoliberalism was sounded by the 2008 crisis, when a catastrophic financial collapse was prevented only by spending billions of taxpayers’ cash to prop up the corrupt and out-of-control banking system. But the Frankenstein’s monster did not quite die then, and has limped along for another decade despite financial scandals and failures, with the public purse being ripped off time and again. The collapse of Carillion is one more nail in the coffin of the monster, but it is still not dead. It is time to ensure that it finally dies, and soon.

I am a member of the Select Committee on Public Administration and Constitutional Affairs, which is an excellent Committee with a first-class Chair and brilliant staff. As we have heard, the Committee has just produced its own report, which is very well written and contains much good material, but I was unable to support it because it did not draw the obvious conclusion that the drive to outsource and privatise—to hand vast sums of public money to grasping private companies through PFI schemes and outsourcing—has been an enormous and costly mistake, driven by ideology and not the public interest. We should have said in the report that PFI should be abandoned forthwith, and that the process of insourcing should be supported and accelerated.

The report says:

“PFI financing costs more than government financing because the state can borrow at a cheaper rate than the private sector. While we are confident that PFI costs more than conventional procurement, neither…the National Audit Office nor the Public Accounts Committee can find any evidence of the benefits the Government claims”.

This is pretty damning, but the report stops short of saying that PFI should be stopped now and for good and confined to the dustbin of history.

We have been here before—long before Carillion—with the collapse of Jarvis 14 years ago. At that time, I put a question to the then Prime Minister in the following terms:

“My right hon. Friend will be aware that the private finance initiative contractor, Jarvis, has been teetering on the brink of bankruptcy for weeks now. This is putting at risk a large number of school repair schemes and other public sector works. Would he not think it sensible, given that Jarvis’s share price has now collapsed to junk levels, to buy out all those public sector schemes, get them done in the public sector, and save billions of pounds of public money?”—[Official Report, 14 July 2004; Vol. 423, c. 1408.]

As hon. Members may have guessed, I received no sensible answer. Now, 14 years on, we have Carillion, and the present Government are still persisting with the failed models of privatisation, including the appalling PFI.

Some public authorities are beginning to insource, with significant financial and service benefits, but the drive to privatise continues, especially in the national health service. The failures of the model are legion, from prisons to probation, and from long-term care to smaller issues such as building control. But perhaps the greatest—

[Madam Deputy Speaker (Dame Eleanor Laing)]

Order.