Carillion: reporting under the spotlight
Kathryn Cearns OBE considers the reasons behind Carillion’s collapse, including working capital, the Financial Reporting Council’s response and the lessons it has taught to others.
The failure of Carillion Plc, a major outsourcing company, has led to substantial criticism of its reporting. Strangely perhaps, the reporting and the auditing seem to have been given far more attention by some than the actual underlying reasons for its failure. What this seems to demonstrate, yet again, is that there are unrealistic expectations about the ability of reporting or auditing to predict a corporate failure; and yet neither was developed for that purpose.
This doesn’t of course mean that the reporting (or the auditing) was not at fault, but more evidence is required to demonstrate it. Just looking at the financial reporting however, it seems unlikely that anyone from the outside can tell whether the company was following the recognition and measurement rules properly; only when the Financial Reporting Council (FRC) has carried out its ongoing investigation will a regulator get to look at what was in the books, when information was known and so whether accounting judgements taken were reasonable or not. Commentators that have alleged the accounting for long-term contracts and goodwill impairment were not properly carried out cannot be confident if that is the case yet. There has also been an unhelpful tendency to elide the question of whether the company complied with Standards with the rather different one of whether the Standards are fit for purpose or not.