Carillion’s collapse has highlighted a flaw in accounting practice that hid millions of pounds worth of debt from the construction giant’s balance sheet, a report by Moody’s investors service claimed.
Carillion’s 2016 balance sheet said the group’s bank loans and overdrafts amounted to £148M but an additional amount up to £498M was owed to banks under a reverse factoring arrangement that started in 2013.
Reverse factoring is an increasingly popular financing arrangement where banks pay a company’s invoices to suppliers as a form of temporary lending, Moody’s said.
Moody’s senior credit officer and report author Trevor Pijper said: “Carillion’s approach to its reverse factoring arrangement had two key shortcomings: the scale of the liability to banks was not evident from the balance sheet, and a key source of the cash generated by the business was not clear from the cash flow statement.”
Carillion reported group operating profit, excluding disposal gains, totalling £501M between 2013 and 2016 which was corroborated by the cash flow statement, Moody’s said. There was no disclosure that this included bridging finance supplied by banks under the reverse factoring arrangement.
It is not unusual for companies not to disclose agreements with suppliers and banks, the investors service said, because there is no specific accounting requirement. “The possible existence of these arrangements can often only be uncovered by close scrutiny of the amounts reported as trade payables and other creditors”, the report said.
Carillion suffered from “poor” management and “aggressive accounting”, an independent business review published last week found. The review, carried out by FTI Consulting and commissioned by lenders, had been due for presentation to Carillion’s investors on 17 January, two days after the firm went into liquidation.
MPs on the joint parliamentary inquiry that made the business review public accused the company of “gross failings of corporate governance and accounting.”