Carillion rivals warned by accounting regulator not to fall foul of poor practices

 
Oliver Gill
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Accounting regulators opened an investigation in KPMG earlier today (Source: Getty)

Britain's top accounting regulator today fired a shot across the bows of Carillion's rivals, warning them and their auditors to avoid accounting pitfalls that blighted the failed contractor.

The Financial Reporting Council (FRC) published a note reminding all parties of financial reporting obligations "in the light of the collapse of Carillion".

The warning was published as the FRC opened an investigation into KPMG's accounting sign-off of what was Britain's second-biggest contracting firm.

It is the first time the FRC has issued a standalone cautionary note since 2015 – then it warned the grocery sector in the wake of an accounting scandal at Tesco.

Regulators met with Big Four accountancy firms last week to discuss construction and business support services sector accounting.

"It isn't something done on a whim," a well-placed source told City A.M..

Read more: Accounting watchdog launches probe into KPMG's audit of Carillion

Going concern

The six-page FRC note covered topics such as the viability of a business, going concern, cash flow issues and pension problems.

Industry insiders said there was nothing fundamentally new in the FRC guidance. Regulators were keen to remind sector of obligations and the note was a reiteration of best practice, they said.

But builders praised the move.

“Given the knock-on impact on a whole range of third-party sub-contractors when a contractor goes bust, it is in everyone’s best interest that accounting and reporting frameworks are sufficiently robust," said Federation of Master Builders chief executive Brian Berry.

"The construction industry needs to move away from unsustainable business models that rely on wafer-thin margins and which can only serve to heighten risk. Accounting frameworks and reporting requirements can aid this by making sure that the underlying financial reality of a firm is clear to see."

The accounting regulator guidance zeroed in certain cash flows where banking facilities made it hard to tell whether the money had either been paid by customers or to suppliers, as opposed to funded by lenders.

The FRC wrote: "The new requirements provide an opportunity for companies to improve the clarity of their disclosures, particularly in those areas where investors have voiced disappointment."

Meanwhile, this evening Sky News reported the former chair of Carillion's audit committee Andrew Dougal was facing a battle to keep his role at Victrex after shareholder group Institutional Shareholder Services (ISS) recommended abstaining from a vote on his re-election.

Read more: MPs hit out at Carillion for decade of pensions “wriggling”

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