Outsourcing: Carillion and potential crimes affecting councils

“The collapse of the construction giant Carillion has hit the headlines again as auditing failures among the Big Four accountants have come to light. For many, the real impacts (and horrors) of the collapse are only now emerging.

Oxfordshire county council has spent £1.7 million on an audit of the council’s ten-year services contract with the company. It reveals shocking levels of oversight — missing building certificates, fire safety issues, unmet planning conditions — and the scale of the damage done, in health and safety and in financial terms, is breath-taking, especially when you consider the council spent a total of £123 million with Carillion on 602 municipal projects.

We are still to find out exactly what happened behind the scenes, and the results of the Financial Conduct Authority’s (FCA) criminal investigation is hotly anticipated.

The news of the collapse in January was reported alongside photos of the directors’ properties, and details their extravagant pay deals. In June this year the FCA said it was “looking into” allegations of insider trading. Perhaps this was a result of a complaint made in February, by people who say they have been the victims of the directors’ crimes. Increasingly the police are failing to investigate financial crimes, through sheer lack of resources. Will the FCA be able to do any better?

The long story short goes like this: Carillion’s directors had a stack of duties and obligations because they ran a PLC. The huge pay deals are supposed to be there for a reason. One of their many obligations was to keep the market informed of the company’s financial situation. Dishonestly failing to do that is a crime called “misleading statements”. Making misleading statements is related to the crime of insider trading. The point of both crimes is the same: to keep the markets fair. The victims, or at least the people making a complaint against Carillion, are the bosses of a firm called Kiltearn Partners. Kiltearn is an institutional investor: a business which invests large sums in stocks and shares on behalf of lots of smaller investors, such as people putting money into a pension.

In January 2017 Kiltearn owned 10 per cent of Carillion’s shares on behalf of their clients. In March that year Carillion published its 2016 accounts, and everything was painted in rosy colours. Kiltearn staff had no reason to think they should be selling its shares in Carillion. Not until a couple of months later anyway. Because on July 10, 2017, Carillion told the market about a massive problem — there was an £845 million hole in its cash flow. It said it needed to make provision for this, and basically wrote it off. Unsurprisingly the share price tumbled, and Kiltearn was left with the feeling it had been had. Bosses called for an investigation into whether Carillion’s management knew, or should have known, about the cash flow issue — with this statement Kiltearn was reporting a crime.

If there turns out to be solid evidence that the Carillion directors have committed market crimes, it looks likely to follow there will also be evidence that they have committed fraud. It could even be a first prominent outing for “fraud by failing to disclose information”, a section of the Fraud Act 2006.

It will be interesting to see if the FCA has the skill and determination — and ultimately the evidence — to bring the directors to book. In the meantime, it is likely we will continue to see other victims of Carillion’s collapse emerge.”

The author is a barrister at 23 Essex Street

Source: The Times