Three former Carillion directors are set to be fined nearly £900,000 for “recklessly” publishing misleading accounts.
The contractor’s former chief executive, Richard Howson, is set to be landed with a £397,800 fine, while chief financial officer Richard Adam faces a fine of £318,000.
The Financial Conduct Authority (FCA) said it also wants to fine former finance director Zafar Khan £154,400. Khan took over from Adam in January 2017.
If Carillion were not in liquidation, it would have been fined £37.9m, the FCA said in a statement.
Three of Carillion’s financial statements – published on 7 December 2016, 1 March 2017 and 3 May 2017 – were “misleading and did not accurately or fully disclose the true financial performance of Carillion”, the FCA said.
“Those announcements made misleadingly positive statements about Carillion’s financial performance generally, and in relation to its UK construction business in particular.
“The announcements did not reflect significant deteriorations in the expected financial performance of Carillion’s UK construction business and the increasing financial risks associated with it.”
The directors were “each aware” of the contractor’s deteriorating performance. “Despite their awareness of these deteriorations and increasing risks, they also failed to make the board and the audit committee aware of them, resulting in a lack of proper oversight.”
Although the company was “deteriorating significantly” in the run-up to its insolvency, Howson put “significant pressure” on it to meet “very challenging targets”, the FCA said.
“This led to an increasingly large gap between the assessments within [Carillion] of its financial performance and its performance as budgeted and ultimately reported to the market.”
Howson, Adam and Khan are taking the case to the UK’s appeal court, known as the upper tribunal, which will decide whether to uphold the fines or take further action.
The regulator’s announcement follows the £14.4m fine handed to Carillion’s auditors, KPMG, by the Financial Reporting Council, which was announced in May. KPMG’s UK chief executive admitted in January that the firm had misled regulators.
FCA executive director of enforcement and market oversight Mark Steward said Carillion’s actions amounted to “market abuse”.
The firm’s failure to reports its real financial figures meant that its true financial position was “hidden” for many months, which exacerbated its financial situation, and made the situation worse for its shareholders and creditors.
“[Market abuse is] as damaging to market integrity as insider dealing and manipulation, though not often described in this way,” Steward added.
Carillion’s collapse in 2018 sent shockwaves through the construction industry. The effects of the fall of the UK’s second-biggest contractor are still being felt today.
At the time of its liquidation, Carillion was building the Midland Metropolitan Hospital. The job was thrown into disarray as the contractor fell apart and it is now six years behind schedule. Balfour Beatty took over the project after Carillion went bust.
The Royal Liverpool Hospital, which Carillion was also building is set to open by October, some five years later than expected, with the facility being completed by Laing O’Rourke.
Carillion’s ‘misleading’ announcements
Two of the announcements, in December 2016 and March 2017, concerned Carillion’s full-year results for 2016. Both updates told investors the company was “well positioned to make further progress in 2017” on its 2016 performance. In 2016, the company made a £146.7m pre-tax profit on turnover of £4.39bn.
The May 2017 announcement was a trading update, released on the day of the company’s annual general meeting. It was titled Trading Conditions Unchanged. It included a statement from chief executive Richard Howson, which said: “Trading conditions across the group’s markets have remained largely unchanged since we announced our 2016 full-year results in March.
“Consequently, we continue to focus on the priorities we set out when we announced our 2016 results – namely to accelerate the rebalancing of our business into markets and sectors where we can achieve our objectives for margins and cashflows; and to manage challenging contract positions, particularly in our international markets, as these are key to achieving our objective of reducing average net borrowing.”
Two months after the AGM update, the company released a half-year trading update on 10 July, announcing that it would make a £845m provision for bad contracts, of which £375m was related to UK construction projects. Net debt was also significantly higher than at the end of 2016, reaching £695m, up from £586.6m. Howson stepped down as chief executive with immediate effect.
Six months later, the company went under.