Collapse of construction giants prompts new FRC framework
When the second largest UK construction company goes into liquidation 189 days after its first profit warnings the question everyone is asking, why and at what cost?
The Financial Reporting Council (FRC) have initiated an enquiry into KPMG in respect of the 2014, 2015 and 2016 accounts. One would imagine that Deloittes actions who were the internal auditors with a different set of responsibilities will also be scrutinised.
The FRC have issued an Accounting & Reporting framework for the construction and business support services and sectors. They took a similar action when Tesco’s income recognition policies came under scrutiny.
One may think that the horse has already bolted and it is too late to close the stable door. However there is potentially, if not an expectation, that the failure of Carillion will bring the failure of other companies who either worked directly for the contractor or who through third parties supplied them.
The FRC guidance is a resume of various accounting standards and other relevant good practice for both directors and auditors.
Particular areas they have highlighted include:
- Directors must access the company’s ability to continue to adopt the going concern basis of accounting and disclose any material uncertainty
- Therefore the need to consider changes in conditions (presumably referring directly to the impact Carillion has had)
- Directors tend not to air their dirty washing in published accounts but disclose they must.
- Directors have a responsibility to various stakeholders which include employees and members of the company pension scheme. It is not just the stakeholders or themselves!
- They remind directors that they should produce clear and detailed description of their principal risks and uncertainties and the judgements made
- Basically a reader of the company’s financial statements should be able to deduce the impact of management’s accounting policy decisions, the recoverability of assets recognised and the extent that assets and liabilities may be subject to significant change over the following twelve months.
- Proper disclosure of any contingent liabilities arising from contracts
- Disclosure of non-recourse finances as non-disclosure policies hides a dependency that could be subject to change.
The role of auditors and audit committees is also summarised. One can only read into this as a reminder that they will be prepared to take action against those that have not conducted themselves to the highest standards.
The warnings are there for everyone in the industry to take head.
What can you do?
- Consider the impact of Carillion on your business you may not have lost money – but possibly future incomes will be lost or your contractors/suppliers may be of risk
- Check the financial viability of your supply chain – ask for management accounts, cash flow forecasts with sensitivity (remember Quintain said they decided not to award a large contract to Carillion due to their due diligence)
- Reassess your business model – look thoroughly at its viability and sensitivities to the outside market conditions – adequacy of finances to cover short falls
- Look closely at your accounting policies, are they adequate and are they correctly disclosed in your financial accounts?
- Reassess your risk management – quality of contract, margins, length of contract, viability of the end user and cost control
- Discuss with your auditor the content of your annual financial statement and ensure they meet the latest guidance statement.