Committees

Carillion board minutes reveal last CFO blew whistle on accounting irregularities

27 February 2018

The Work and Pensions and Business, Energy and Industrial Strategy Committees publish follow up inquiries to Emma Mercer, Carillion's last Financial Director, who took up the job when Zafar Khan was forced out in September 2017.

Raising concerns about accounts

The queries are prompted by minutes of Carillion board meetings which show that, upon her return from Canada and just six weeks into the job as Finance Director (FD) of Construction Services in the UK, Emma Mercer was raising concerns about the accounts she found – or "whistle-blowing" as it is described in the minutes.

Apparently not satisfied with the response she got from then CEO Richard Howson or FD Zafar Khan when she flagged these concerns, so took them up with the Group HR Director.

The minutes show:

She [Emma Mercer] had advised Mr Adam Green, the MD, that she had identified some issues with which she was not comfortable. Mr Adam Green alerted Mr Howson on 15 April, and asked Mr Khan to discuss the position with her.

"On 3 May, Mrs Mercer had raised with Mrs Dawson [Group HR Director] that she had concerns, and Mr Howson met with Mrs Mercer on 5 May."

Mrs Horner [Chair of the Remuneration Committee] "noted that Mrs Mercer appeared to be a whistle-blower who did not feel she was listened to – hence her conversation with Mrs Dawson."

Mrs Mercer's revelations threw up some serious questions, not least for the Company's auditors, KPMG. At stake was whether the 2016 year-end traded position could still be supported:

"Mr Khan noted that KPMG had been surprised that the issue had not been identified as the two key leads were intimately familiar with the construction contracts.

Mr Dougal confirmed he had spoken to Mr Meehan, who had indicated that KPMG needed to review and reassess the judgments on each contract. They would separately have to consider the position at the year-end and thereafter to assess the traded position subsequent to the year-end.

Given the obvious significance of the two main contracts we needed to review the traded position – his [Zafar Khan's] view was that there had been incompetence and laziness in the accounting review of the contract and in recognising the position."

Mrs Horner noted "that it would be necessary to consider further how the issue had arisen and the role of KPMG in due course."

"Mr Dougal noted also that it was necessary to understand the KPMG position further. The understanding had been that KPMG had a good approach to the audit of contract judgements but clearly in this instance it did not pick up this “sloppy accounting” and it would be necessary to understand what KPMG would itself do differently in future."

Raised some fairly substantial questions

Emma Mercer's findings triggered a review of contracts, though the Board's initial decision to have an independent element to this review was later reconsidered.

"Mr Cochrane felt that the position raised some fairly substantial questions around the ability to manage large contracts properly, and the broader question of culture. There was a risk of over-optimism – the "glass-half-full" thinking and he questioned whether there should be a broader review to assess the reasonableness in the round of the positions being taken in totality.

He agreed with Mrs Horner than an independent review was required as the position seemed to ring alarm bells and raise red flags."

"Following discussions subsequent to the meeting of 9 May, it has been agreed that the independent accounting review of the 2016 year-end position in relation to the contracts envisaged as party of the four-stage review will not now be required. The plan will proceed on the basis of a three-stage review comprising the internal review, the KPMH review and the sub-committee of the Board chaired by Andrew Dougal."

The three-tier review concluded that the 2016 year-end position did not need to be restated. Peter Meehan, KPMG, summarised: "He did not believe that there was an intent to deceive, but rather was due to incompetence, negligence or sloppy accounting."

Company falling apart at the seams

Rt Hon Frank Field MP, Chair of the Work and Pensions Committee, said:

"Emma Mercer took just six weeks to spot and pull the thread that began the entire company unravelling. That the next Chief Financial Officer had to go through whistle blowing procedures to get her concerns about accounting irregularities taken seriously by the Carillion board is extraordinary. So too is that the board's response was to reject an independent review and get KPMG, their pet rubber-stampers, to mark their own homework.

While our witnesses have been reticent in oral testimony, these minutes begin to reveal the true picture of a company falling apart at the seams in full view of the board and their auditors."

Company staff and investors foresaw what directors couldn't

Rachel Reeves, Chair of the Business, Energy and Industrial Strategy Select Committee, said:

"Carillion directors say they couldn't foresee what investors and company staff could – that spiralling debt problems and failing contracts were destined to sink the company. These board minutes point to a very different scenario – Emma Mercer was sounding the alarm but none of the Carillion directors were willing to wake up and listen".

The timeline below shows the series of events from Emma Mercer's return from Canada to the "enhanced contract review" conducted by KPMG. This led to the £845m contract provision announced on 10 July 2017, which was a significant factor for the Company's eventual collapse in January 2018.

After a decade at the helm of Carillion's finances, Richard Adam sold his entire existing shareholding the day the 2016 accounts were published, and the rest the moment they vested, netting himself another £ ¾ million from shares that are now, of course, worthless.

Further information

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