Contract accounting and the 2017 write-downs

analysisOn 10 July 2017 Carillion issued a profit warning announcing that it would reduce the value of several major contracts by a total of £845 million in its interim results. According to the joint report of the House of Commons Work and Pensions and Business, Energy and Industrial Strategy Committees, the share price fell by 70%, from 192p on Friday 7 July 2017 to 57p by Wednesday 12 July, and never recovered, falling to 14p by the time the company filed for liquidation on 15 January 2018. Carillion's interim results of 29 September 2017 reported no change to the £845m provision for construction contracts, a further £200m provision for support services contracts, a £134m goodwill impairment charge for the UK and Canadian construction businesses and a first-half loss before taxation of £1,153m. The committees record that the results left net liabilities of £405 million and borrowing of £961 million, with the working capital ratio down to 0.74. ^{1 2}

analysisThe notice of 12 October 2023 from the Financial Reporting Council (FRC) summarises the outcome as expected provisions totalling £1.045 billion announced in July and September 2017, primarily arising from expected losses on a number of contracts, together with the goodwill impairment charge of £134 million. Carillion's group business plan of January 2018, as cited by the committees, shows that £729 million of the £1,045 million contract provision was set against trade receivables and the rest added to future costs. ^{1 3}

analysisAccording to the committees, drawing on unpublished February 2017 audit committee papers, in December 2016 Carillion was recognising £294 million of construction revenue that was 'traded not certified', that is, revenue not yet signed off by clients, such as claims and variations; this was an increase of over £60 million since June 2014 and over 10% of total construction contract revenue; the amount was never publicly disclosed in the financial statements but was included in papers the audit committee reviewed quarterly. Emma Mercer told the committees that on her return to the UK she found 'slightly more aggressive trading of the contracts' than she had previously experienced there. The audit committee chair, Andrew Dougal, disputed the inference that the figures showed more optimistic accounting: he wrote that year-end non-certified trading revenue in construction was relatively stable from 2011 to 2015, between £248 million (2011) and £264 million (2012), and that the December 2016 figure of £294 million included £37 million of foreign-currency effects, leaving an underlying £257 million against £250 million at 31 December 2015; until mid-2017, he wrote, he was not aware of slightly more aggressive or overly optimistic accounting in traded positions. He also wrote that after the Enhanced Contract Review it was clear that some 2017 traded positions were no longer justified, which led in part to the July 2017 provision. In the committees' words that provision conceded that £729 million of revenue Carillion had previously recognised would not be obtainable, the part of the £1,045 million total provision that, according to Carillion's January 2018 business plan, was set against trade receivables. ^{1 2}

analysisAccording to the audit committee's report in Carillion's 2016 annual report, management had implemented a system of 'peer reviews', under which experienced teams from other projects reviewed the performance of individual contracts; summaries of the peer review reports were provided to and reviewed by the committee, which was satisfied that the process continued to work well and was a very useful additional source of assurance. The report does not say what the summaries contained. Deloitte's later account, quoted to Andrew Dougal by the committees, is that the differences between the peer reviews and management's appraisals surprised the CFO, the audit committee chair and the interim CEO when they were shared in August and September 2017. ^{1 2}

analysisIn letters to the committee chairs of 13 and 27 March 2018, Deloitte, Carillion's internal auditor, reported that its work in July and August 2017 on the peer reviews undertaken between January 2015 and July 2017 for the contracts that received provisions found that 42% recommended a forecast end-of-life margin lower than management's contract appraisal, more than half of these by over £5 million, and 14% a higher one. It listed 11 peer reviews on four contracts where the adverse variance exceeded £5m: Royal Liverpool University Hospital (£53.9m in November 2016, £31.3m in May 2016, £12.9m in September 2015 and £7.8m in March 2015), Midlands Metropolitan Hospital (£16.9m in November 2016 and £5.6m in April 2017), Battersea (£75.3m in October 2015, £6.6m in March 2015 and £6.3m in April 2016) and the Toronto Transit Commission (TTC; £24.5m in June 2016 and £15.0m in July 2015). The 27 March letter was signed by Michael Jones, the Deloitte partner responsible for Carillion's internal audit. Deloitte stated that the reviews, spread over 30 months, reflect how the contracts evolved, including variations and settlements, and that it had no responsibility for preparing or auditing the 2016 financial statements. Answering the committees, Mr Dougal wrote that management's view, with which KPMG agreed after an audited re-examination of the key contracts, was that the write-down was connected to matters in the 2017 financial year and that there was no fundamental error in the positions traded in the 2016 accounts. In October 2023 the Insolvency Service, accepting an eight-year disqualification undertaking from Richard Howson, stated that Carillion's 2015 and 2016 financial statements were misstated in respect of the major contracts, among them the Royal Liverpool University Hospital, Midlands Metropolitan Hospital and Battersea Power Station, by £95.4m for 2015 and £179.2m for 2016. ^{3 2 4 5}

analysisFor the Royal Liverpool University Hospital contract, the committees reported that a November 2016 peer review indicated a loss of 12.7% against a contract appraisal margin of 4.9% profit, so that the annual accounts published in March 2017 recognised approximately £53 million more revenue than the peer review estimate would have produced; the July 2017 profit warning included a provision of £53 million against that contract. Deloitte quoted a difference of £53.9 million based on the November reviews, while audit committee papers show that the year-end position used a margin of 4.44%, which the committees equate to £52.5 million. That figure is the committees' own calculation from Deloitte's figures and unpublished audit committee papers; Deloitte said it could not comment on what the 4.44% margin reconciled to. Richard Howson told the committees that the costs of rectifying cracked beams at the hospital arose in the second quarter of 2017 and added 'over £20 million of cost to our completion', and that Carillion 'did not just cover it up'. In October 2023 the Insolvency Service, accepting an eight-year disqualification undertaking from Mr Howson, stated that he caused Carillion's 2015 and 2016 financial statements to account for the Royal Liverpool University Hospital and the other major contracts in a way he ought to have known falsified and concealed the reality of their deterioration, and put the 2016 misstatement in respect of the major contracts at £179.2m. ^{5 3 4}

analysisAndrew Dougal wrote that Michael Jones of Deloitte first raised with him the variance between management's views and the peer review appraisals in September 2017, that he did not know whether Richard Howson, Zafar Khan or Richard Adam knew this information at the time and, if so, why it was not shared, and that the issues were not flagged to the board or audit committee by the company's internal or external auditors. With hindsight, he wrote, it would have been helpful for the audit committee to have the information to factor into its challenge of management's judgements, but management's view, with which KPMG agreed, remained that there was no fundamental error in the positions traded in the 2016 accounts. What each person knew is given here only as Mr Dougal states it; in Deloitte's account of the August and September 2017 discussions, the CFO, the audit committee chair and the interim CEO expressed surprise at the differences. In July 2022 the Financial Conduct Authority (FCA) stated, in Decision Notices that were then provisional, its view that Mr Howson, Mr Adam and Mr Khan were each aware of the deteriorating expected financial performance of Carillion's UK construction business and failed to make the board and the audit committee aware of it. After they withdrew their challenges, the FCA fined Mr Adam £232,800 and Mr Khan £138,900 in January 2026 and Mr Howson £237,700 in February 2026, stating that each had been aware of serious financial troubles in the UK construction business and had failed to alert the board and audit committee. ^{2 6 7 8}

analysisCarillion had three finance directors between 2007 and its collapse. The committees' report states that Richard Adam was Finance Director from 2007 until he retired at the end of 2016; that he was replaced by Zafar Khan, previously the Group Financial Controller, who held the post for nine months; and that Emma Mercer replaced Mr Khan in September 2017 and remained in post until the company collapsed, without joining Carillion plc's board. Carillion's 2016 annual report refers to the change of Group Finance Director with effect from 1 January 2017. Robin Herzberg was Group Head of Risk: the 2014 annual report made him responsible for co-ordinating the reporting of strategic risk issues across the group, oversight of risk management and training, and an independent appraisal of all projects before submission to the Major Projects Committee, and Andrew Dougal's letter describes him as Head of Risk when he looked into Emma Mercer's concerns about negative accruals. ^{1 2 3 4}

analysisAccording to the committees, Emma Mercer, on returning to Carillion's UK business in April 2017 after three years in its Canadian business, spotted an anomaly in the way the company classified receivable balances on construction contracts: the use of 'negative accruals', netting off payables and receivables balances, which KPMG confirmed was permitted under international accounting standards on construction contracts but which Carillion had a 'golden rule' not to use. By the account in Andrew Dougal's letter of 5 April 2018 to the committee chairs, he first became aware of the concerns shortly after the board meeting and annual general meeting of 3 May 2017 (the letter prints '3 May 2047', evidently meaning 2017), when the chairman, Philip Green, told him that Mrs Mercer had raised them and that the Head of Risk, Robin Herzberg, was looking into them urgently; KPMG had identified one non-material negative accrual on a UK services contract during the 2016 audit, referred to in its year-end memorandum to the audit committee of 23 February 2017 and described by management as a one-off administrative error, whereas Mrs Mercer's concerns indicated wider use in the UK Construction business affecting several projects. The committees, drawing on board minutes including those of 15 May 2017 and on Mrs Mercer's evidence, report that the board agreed her concerns should be investigated but did not commission a full independent review, instead inviting KPMG to review work it had previously audited and approved. Mr Dougal's account of how the review was set up is that a board meeting on 9 May 2017 first planned a four-stage review including an independent external firm, but that the board then agreed a three-stage review (an internal review with Mrs Mercer in a key role, a review by a KPMG team not involved in the 2016 audit of the UK Construction balance sheet, and a sub-committee he chaired), considering that it ensured sufficient independence without the delay of an external review. According to the National Audit Office, the review whose results the board received in May 2017 identified that some accounting practices had understated the costs of some contracts; Carillion decided that there was an associated understatement of revenue, so that it did not need to restate its 2016 accounts, and KPMG agreed. The committees describe KPMG as agreeing with the board's conclusion that, although Carillion had misclassified assets, it had not misstated revenue, and record that the review nonetheless triggered the wider contract review that led to the £845 million provision in July 2017. ^{1 4 5}

analysisAndrew Dougal, the audit committee chair, also wrote that Zafar Khan, then Group Finance Director and formerly Group Financial Controller, confirmed at the 9 May 2017 board meeting that he had not been aware of the use of negative accruals until Mrs Mercer tabled it, and that he (Dougal) did not know whether Mr Khan's predecessor, Richard Adam, had been aware of it; Mr Khan's and Mr Adam's knowledge is stated only as Mr Dougal reports it or does not know it. He described the use of negative accruals as a breach of Carillion's internal reporting guidelines, though acceptable under accounting standards, and wrote that it was ultimately the responsibility of the UK Construction division's finance director and the Group Finance Director to ensure the guidelines were followed, to identify breaches and, where necessary, to bring them to the attention of the auditors, the audit committee and the board; the audit committee, he added, was disappointed that the use of negative accruals had not been identified in the audit. In July 2022 the FCA, publicly censuring Carillion, stated its view that Carillion's systems, procedures and controls were not sufficiently robust to ensure that contract accounting judgments in its UK construction business were appropriately made, recorded and reported internally to the board and the audit committee. In January 2026, after Mr Adam and Mr Khan withdrew their challenges, the FCA fined them £232,800 and £138,900, stating that as finance directors they had responsibility for Carillion's procedures, systems and controls relating to financial reporting. ^{4 6 7}

analysisAccording to the committees, September 2017 audit committee papers showed that at least 18 contracts suffered losses over the March–June 2017 period, and a June 2017 'lessons learned' board minute noted that 'management need to be aware that high-level instructions such as that to "hold the position" (i.e. maintain the traded margin) may, if crudely implemented, have unintended consequences'. The minutes record Andrew Dougal identifying 'perhaps also a hold back of bad news' on one recent contract, which he later told the committees was the Royal Liverpool University Hospital contract. This is the committees' reading of internal board and audit committee papers that are only partly published; Mr Dougal's remark is quoted from the minutes and explained in his own letter, where he wrote that the hospital project had suffered significant problems, including an asbestos issue, power supply delays, design issues and a cracked beam, which deteriorated further in the second quarter of 2017, and that he was raising whether the serious consequences of these deteriorations were made clear enough to the board as soon as they could have been. The enhanced contract review led to the £845m provision for construction contracts announced on 10 July 2017; Carillion's interim results of 29 September 2017 left it unchanged, added a further £200m provision for support services contracts and a £134m goodwill impairment charge, and treated the contract provisions as changes in estimate requiring no restatement of comparative amounts. In October 2023 the Insolvency Service, accepting an eight-year disqualification undertaking from Richard Howson, stated that he caused the 2015 and 2016 financial statements to account for the major contracts, including the Royal Liverpool University Hospital, in a way he ought to have known falsified and concealed the reality of their deterioration. ^{1 2 3 4}

analysisThe July 2017 contract provision rose over the weekend before its announcement. A footnote to the committees' report, citing unpublished audit committee papers, states that an initial contract provision of £695m was presented to Carillion's board on 7 July 2017 and increased to £845m by 9 July, with a corresponding £15m increase in the provision against the Royal Liverpool hospital contract. Keith Cochrane, who took on the role of Interim Chief Executive after the profit warning, explained to the committees that he personally took the decision to increase the provision over that weekend, and the committees' written questions to Andrew Dougal, printed in his reply, likewise state that the 2017 contract review recommended a provision of £695 million, subsequently increased by management to £845 million. ^{1 4 2 5}

analysisAndrew Dougal's letter of 5 April 2018 states that in the 2017 Enhanced Contract Review the KPMG audit team reviewed 58 contracts, representing 73% of total group receivables, on an accelerated basis, the 11 most significant and complex being subject to 'enhanced' testing by KPMG major contract specialists. The committees reported that this work on the review of key contracts begun in May 2017, which KPMG called a 'deep dive' 'beyond the level of detail that would typically be completed by the audit team', noted that 'claims are booked earlier in the Group than would be by certain others in the industry' and 'a lack of consistency and guidance around the Group in when to recognise value on claims'; KPMG's report on the review is not published. Answering the committees' question, which cited KPMG's note that it had challenged management to consider whether the results evidenced a prior period error, Mr Dougal wrote that management concluded the changes related to subsequent events (the decision to withdraw from construction in Canada, Qatar and Saudi Arabia, and challenges on certain UK contracts that crystallised after the 2016 annual report), that KPMG's report to the audit committee of 9 July 2017 agreed with management's assessment, and that the committee, having questioned the position at length, was satisfied. Carillion's interim results of 29 September 2017 accordingly treated the contract provisions of £1,045.5m as changes in estimate under IAS 8, with no restatement of comparative amounts. In the committees' assessment, findings that emerged only from 'deep dives' raised questions over the adequacy of KPMG's core audit work, and KPMG's explanation of the provision mirrored the directors' account that its causes were events after the accounts were published on 1 March 2017. Peter Meehan, the KPMG audit partner who signed off the accounts, told the committees that KPMG's previous work was extensive, citing large numbers of site visits. Mr Dougal wrote that neither he nor, to his knowledge, other audit committee members were aware of the lack of consistency on claims before KPMG's report, that he understood the observation to refer to guidance at contract and business-unit level rather than to senior management's approach at division and group level, and that he did not believe it compromised the accuracy of the revenue recognised. In October 2023 the Insolvency Service stated that the 2015 and 2016 financial statements were misstated in respect of the major contracts by £95.4m and £179.2m respectively, and the FRC found significant and serious breaches in each of KPMG's audits of Carillion for 2014 to 2016, many of them relating to audit work on the most financially significant UK and overseas construction and services contracts. ^{6 4 2 7 3}

analysisThe total contract provision kept rising after the September 2017 interim results. Carillion's January 2018 group business plan reported that the total contract provision increased in the RF4 2017 forecast from £1,045m (as at 30 September 2017) to £1,105m, an increase of £60m that it attributed to items including more aggressive cash settlements on the TTC and Battersea contracts (£10m), further deterioration and contingencies on Royal Liverpool (£15m, with completion delayed from December 2017 to April 2018), Aberdeen (£15m), the Canadian Union and Bremner contracts (£6m, additional legal costs) and a further re-evaluation of the National Offender Management Service prisons services contract with the Ministry of Justice (£11m). The lenders' adviser FTI referred in its draft review to £1.1bn of provisions taken in 2017. ^{8 1 5}

analysisCarillion's audit committee reports describe goodwill as the largest single item on the group balance sheet: £1,449.7 million at 31 December 2013, £1,519.1 million at 31 December 2014, £1,544.3 million at 31 December 2015 (restated for adjustments to 2015 acquisitions) and £1,571.0 million at 31 December 2016. In its 2014 and 2016 reports the committee stated that, after critically reviewing management's impairment assumptions and sensitivity analysis and the external auditor's views, it agreed with management that no impairment was necessary. KPMG listed the carrying value of goodwill among the risks with the greatest effect on its audits; its 2016 report called it one of the key judgemental areas and said its procedures included critically assessing the key assumptions applied in determining the recoverable amount of each cash-generating unit. The House of Commons committees, in an assessment that is not a regulatory finding, noted that goodwill of £1.6 billion in the 2016 accounts represented 35% of Carillion's gross assets and more than double its net assets of £730 million, and that it was never impaired in the annual accounts, including the £330 million recorded on the 2011 acquisition of Eaga despite five consecutive years of substantial losses. They cited KPMG's 2017 half-year update finding that 'historically at least 80% of the Group's net present value has been derived from the perpetuity calculation', an assumption they said neither the company nor its auditor disclosed, and an FRC audit quality review of KPMG, whose sample did not include Carillion, that found 'insufficient challenge of management's assumptions' in some goodwill testing. Carillion's interim results for the first half of 2017 included a goodwill impairment charge of £134m for the UK and Canadian construction businesses, and the FRC's 2023 findings on KPMG's audits included breaches relating to the testing of goodwill for impairment. A High Court judgment of 3 June 2020, which dismissed Carillion's application for pre-action disclosure against KPMG, records that Carillion's solicitors had indicated that KPMG's failure to give proper consideration to the carrying value of goodwill would be among the core allegations of its intended proceedings. ^{1 2 3 4 5 6}

analysisCarillion also booked income from selling intellectual property and licences. Its 2014 accounting policies stated that revenue from the sale of a licence is recognised immediately where an agreement is in substance an outright sale (a signed non-cancellable contract, the licensee free to exploit its contractual rights, no significant ongoing delivery obligations and a fee not expected to be materially adjusted for future activity), with contingent revenue recognised as earned, or the sale income spread over the life of the technology if contingent revenue is significant; its 2016 accounts described licensing income as part of its ordinary activities, 'having completed a similar licensing agreement in 2013'. According to the FRC's October 2023 summary of its second decision, Carillion in 2013 changed its provider of outsourced IT and business process services and, at the same time, concluded other agreements with the same counterparty for the assignment of certain IP rights for a significant sum and for a further sum as a contribution to 'exit fees' payable to the former outsourcing provider; treating these transactions as independent of each other resulted in a significant increase in Carillion's reported 2013 profit. The FRC found that KPMG Audit Plc and Darren Turner, who audited the 2013 accounts, did not obtain sufficient appropriate audit evidence that this treatment was appropriate, did not approach the audit with adequate professional scepticism, failed to consider and respond to the risk of fraud, and failed to identify that the related disclosures in the 2013 financial statements might be misleading. These findings are summarised from an unpublished Final Settlement Decision Notice under the Audit Enforcement Procedure that reflects the respondents' co-operation and admissions, and the FRC stated that the breaches were not intentional, dishonest, deliberate or reckless; beyond those admissions, no separate public response by KPMG Audit Plc or Mr Turner was found in the retained documents. KPMG Audit Plc was fined £3,500,000, reduced to £2,450,000, and severely reprimanded; Mr Turner was fined £100,000, reduced to £70,000, and severely reprimanded. ^{1 2 3}

analysisIn its 2016 audit report KPMG described the £20.0 million of licence income recognised in 2016 as a new risk: the licensing agreement had been entered into at or around the same time and with the same counterparty as a series of contracts extending the scope of the services of the group's back-office outsourcing provider, and the income was recognised immediately in revenue. KPMG identified the risks that the agreements were not independent, so that the income should be spread over the term of the outsourcing contract, that ongoing obligations required it to be spread over another period, or that it should be other income rather than revenue, and reported examining the contracts, meeting the group's legal advisers and third-party expert, and assessing fair values and ongoing obligations. Carillion's 2016 accounts stated that management, after a benchmarking review indicating that the contracts extending the outsourced back-office services were at fair market value and so not linked to the licensing agreement, concluded that the transactions should be recognised independently and, there being no continuing support obligations, recognised the licence revenue immediately; the strategic report said the agreement let its outsourcing partner use elements of Carillion's IT platform in territories where Carillion does not operate and generated some £20 million of profit in 2016, and the audit committee concluded that the judgement was reasonable. In October 2023 the Insolvency Service stated that the 2016 financial statements wrongly reported as profit payments from Wipro in 2016, including £20.0m in respect of 'Geneva' under 'IP Assignment & Licence' agreements dated 9 December 2016. ^{2 4}

analysisRead together, the retained records indicate that the counterparty in both years was Wipro, Carillion's IT and business-process outsourcing provider: the Insolvency Service names Wipro as the payer under an IP Assignment Agreement dated 6 December 2013 and 'IP Assignment & Licence' agreements dated 9 December 2016; Carillion's 2014 annual report set the objective of transitioning its business process outsourcing arrangements to a new provider during 2014, and its 2016 report records an 'extension of the Wipro service scope and contract period'; the lenders' adviser FTI referred to advance payments on 'ICT (Wipro) supplier contracts'; and both KPMG's 2016 audit report and the FRC's summary of the 2013 transactions describe agreements with the same counterparty as the outsourcing contract. This is an inference from matching dates, structure and descriptions: the FRC notice itself does not name the counterparty, and no single retained document states that the counterparty in the FRC and KPMG descriptions is Wipro. ^{3 2 4 1 5}

analysisThe Insolvency Service's background information to its 4 October 2023 announcement that it had accepted an eight-year disqualification undertaking from Richard Howson states that Mr Howson caused Carillion to procure payments from Wipro of £39.0m in 2013 (£25.0m in respect of 'Ecopod' on signing an IP Assignment Agreement dated 6 December 2013 and £14.0m of termination charges 'purportedly payable' by Carillion under a Master Services Agreement of the same date) and of £2.0m in 2014, and of £40.0m in 2016 (£20.0m in respect of 'Geneva' and £10.0m for certain intellectual property under 'IP Assignment & Licence' agreements dated 9 December 2016, and £10.0m of mobilisation costs under change control notes of that date). It states that these payments were wrongly accounted for as profit, overstating 2013 profit by £39.0m and understating net debt by £41.0m, and overstating 2016 profit by £34.4m (Geneva) and understating net debt by £39.2m, in breach of IAS 18, IAS 32 (and for 2016 IAS 38) and the IFRS framework, and that Mr Howson ought to have known of the false accounting and of the concealment from the auditors of the true picture regarding Carillion's obligation to make repayments to Wipro. These are statements accompanying the acceptance of an undertaking, not findings of a court; the undertaking's procedural status belongs with the disqualification proceedings. Carillion's 2016 accounts had stated that management concluded, after a benchmarking review, that the 2016 licensing agreement and the extended outsourcing contracts should be recognised independently. No response by Mr Howson to these specific statements was found in the retained documents; according to the non-executive directors' lawyers, none of the executives' undertakings involved admissions as to the alleged fraud. Companies House records the eight-year undertaking as running from 25 October 2023 to 24 October 2031. ^{6 7 4 2}

analysisAccording to the National Audit Office, the independent business review that Carillion's major lending banks (the Coordinating Committee) commissioned from FTI in October 2017, which remained in draft and was not seen by the Cabinet Office or lenders before the insolvency, reported practices it described as having 'enhanced reported financial performance above underlying operating performance': including profits from equity sales in PPP and PFI projects in operating profit and cash flow; consolidating some joint ventures wholly into cash flow and operating profit; short-term management of working capital and short-term loans from joint ventures to reduce year-end net debt; using early payment facilities to improve supplier payment terms; and securing large advance payments on new contracts at the expense of future profitability. FTI's draft itself stated that 'significant underperformance and contract issues have been masked by aggressive accounting and working capital management'. These are findings of a draft review prepared for the lenders, reported by the NAO, not regulatory or judicial findings. Former Carillion directors told the NAO that, apart from the advance-payments point, they believed these practices were in accordance with accounting standards or had been appropriately disclosed; the advance-payments issue had been identified by management and reported to the board in June 2017, which intended to remedy it. In October 2023 the FRC found breaches in KPMG's 2016 audit work on Carillion's reported debt and going concern, including consideration of its use of a supply chain finance facility, and in May 2026 it announced that the former finance directors Richard Adam and Zafar Khan had accepted misconduct, each admitting recklessness and a failure to act with integrity, in respect of areas including a supply chain finance facility. ^{1 2 3 4}

analysisThe House of Commons committees concluded that Carillion 'used aggressive accounting policies to present a rosy picture to the markets', citing contract margins maintained despite evidence that they were optimistic, revenue recognised for work not yet agreed and the accounting for its early payment facility, and stated that, 'whether or not all this was within the letter of accountancy law, it was intended to deceive lenders and investors'. Before the report, the Comptroller and Auditor General had told the Liaison Committee that 'when all the drains have been pulled up on Carillion we will see some pretty aggressive accounting practices'. This is the conclusion of a parliamentary select committee report, not a judicial or regulatory finding, and the committees expressly left open whether the practices were within accounting law. Zafar Khan, who signed off the 2016 accounts, told the committees he did 'not agree that there was a concerted effort to adopt aggressive accounting as such' and that the reported numbers 'were appropriate, based on the information that was available at that point in time'. The board's public position was that there was no misstatement and that the provisions related to a sudden deterioration on key contracts between March and June 2017, and former directors told the NAO that all but one of the practices identified by FTI were in accordance with accounting standards or had been appropriately disclosed. In October 2023 the Insolvency Service published statements quantifying misstatements in the 2015 and 2016 accounts, accompanying a disqualification undertaking given by Richard Howson, and the FRC published findings of serious breaches in KPMG's audits of those years. The FRC's May 2026 announcement that Mr Adam and Mr Khan had accepted misconduct, each admitting recklessness and a failure to act with integrity, covered areas including major UK construction contracts as well as the supply chain finance facility; the FRC made no finding, and they made no admission, that either acted dishonestly or deliberately. ^{5 6 1 3 4}

analysisThe Insolvency Service's background information to the Howson undertaking also states that Mr Howson ought to have known that Carillion's 2015 and 2016 financial statements did not give a true and fair view. It puts the 2015 misstatement in respect of the major contracts (Royal Liverpool University Hospital, Battersea Power Station, Aberdeen Western Peripheral Route, Midlands Metropolitan Hospital and Msheireb Phase 1(B)) at £95.4m, so that profits should have been £65.3m rather than the £155.1m reported and net current assets negative £57.0m rather than £41.5m; and the 2016 misstatement at £179.2m for the major contracts and £29.3m for the Ecopod and Geneva transactions, so that Carillion should have reported a loss of £61.7m rather than a profit of £146.7m and net current assets of negative £232.5m rather than £52.4m. It further states that Mr Howson ought to have known that Carillion had failed to disclose to its auditors information on the major contracts and the Ecopod and Geneva transactions for the periods ending 31 December 2013, 2015 and 2016, information which he ought to have known was material. These statements accompanied the Insolvency Service's acceptance of an eight-year disqualification undertaking from Mr Howson, which Companies House records as running from 25 October 2023 to 24 October 2031; they are not findings of a court. In 2017 Carillion's board had publicly maintained that the 2016 accounts were not misstated and that the provisions arose from deterioration on key contracts between March and June 2017, and KPMG agreed that there was no prior period error. No response by Mr Howson to these specific statements was found in the retained documents; according to the non-executive directors' lawyers, none of the executives' undertakings involved admissions as to the alleged fraud. ^{6 7 8 9 5}

analysisThe committees concluded that the bonus clawback terms agreed by Carillion's remuneration committee in February 2015, enabling clawback if the accounts needed to be restated or the director was guilty of gross misconduct, were 'so narrow they ruled out a penny being returned', even after the failures behind the £845 million write-down. In September 2017 the remuneration committee agreed new clawback triggers recommended by Deloitte and, at the same meeting, considered asking directors to return their 2016 bonuses, but concluded 'that could not be enforced and would be very difficult to achieve at this stage'; the new terms were too late to affect earlier bonuses. The committees also cite March 2015 board minutes showing that the board was concerned that potential clawback of their bonuses should not include 'retrospective judgements on views taken on contracts in good faith'. That is the committees' assessment of the policy. Alison Horner, chair of the remuneration committee, denied that the terms were overly restrictive, said they made it easier to claw back bonuses and told the committees that misstatement and misconduct were the terms used by '80% of the FTSE'. ¹