10 Oct Construction Giant Carillion’s Collapse Caused 20% Insolvency Increase

A report published by the accountancy firm Moore Stephens has revealed the shocking domino effect caused by the collapse of the construction group Carillion. The industry saw 780 companies fall into insolvency during the first quarter of 2018. This illustrated a 20% increase in insolvencies of UK building firms. Subcontractors, particularly small and medium-sized businesses, were hit the hardest.

This rise, making up an increase of one fifth, was an immediate after-effect of the construction giant’s collapse. The total number of insolvencies suffered amongst building companies equalled 2,674 for the 2017-18 financial year. The increase overall was a substantial 6%. The industry has clearly taken a hit, and the smaller companies bore the brunt.

When Carillion saw its stock market value fall through the floor by 90%, they filed for bankruptcy. The revelation on the news that it had racked up debts of around the £1 billion mark rang the death toll for them. Additionally, the fact that they were struggling to fill a £600 million hole in their pension fund only aggravated the loss of faith in the company.

At the time, Carillion was the country’s second largest building firm. Based in Wolverhampton, and with a 19,000 strong payroll at the time, the company had the cream of the country’s contracts, many commissioned from Whitehall. This included contracts to build roads, schools, and hospitals.

Subcontractors Crippled

The report also revealed how thousands of subcontractors were left with crippling debts following the firm’s liquidation. The combination of these debts and the loss of critical contracts meant that these subcontractors collapsed too. A lot of last-minute finger-pointing took place as it was alleged that ministers realised too late the extent to which the company was in financial difficulties. Furthermore, they aggravated the situation by offering fresh contracts to boost investor confidence.

Lee Causer, spokesman for Moore Stephens, said, “large companies are infamous for squeezing the profit margins of the contractors and subcontractors who work for them. These contractors often cannot negotiate against the terms set for them by their larger clients”. Consequently, the high profile liquidation of Carillion has made the link with an increase in insolvencies more visible.

Small and Medium-Sized Construction Firms Hit the Worst

Those small and medium-sized enterprises that relied heavily on Carillion as a source for a significant amount of their work will have been hit the hardest. The probability is very high that these small businesses will have had to write off the entire debt owed to them by Carillion. Most of these small firms were unable to absorb the resulting financial shock.

A subsequent parliamentary report has revealed further discrepancies. Deloitte, the company’s internal auditors, failed to identify failings in the financial controls. Alternatively, they too readily ignored them. The auditing giant received £10m as the outsourcer’s auditor while thousands of jobs became the casualty of the subsequent fallout.

Since the revelations of these reports, the government has now called for a comprehensive review of the UK auditing industry. The sector, which is dominated by firms known as the “big four” could be forced into huge changes. Especially after collapse brought renewed calls for changes to the sector. Carillion collapsed hot on the heels of BHS, a major high street company. Consequently, serious shortcomings in the auditing process came to light.