Construction giant Carillion plc has gone into liquidation, and unfortunately many of those companies that are owed money won’t now last much longer.

These domino effects put a spotlight on the diligence of these companies – but there are measures that we can all put in place to negate these effects as far as possible.

The loss of 43,000 jobs came along with Carillion’s closure, 20,000 of which are in the UK.

Major implications will follow for some of the biggest building projects across the country, and the entire supply chain is likely to be effected in some way. So, how did things go wrong, and what happens now?

Accountants are under scrutiny

The ‘Big Four’ top accountancy firms have been put under close scrutiny following the Carillion debacle. These firms, namely KPMG, PwC, Deloitte and EY, reportedly have a very close relationship with the company bosses.

Even four years ago, the Competitions Commission (accountancy watchdog FRC, Financial Reporting Council’s predecessor) commented that these relationships create a ‘tendency for auditors to focus on satisfying management rather than shareholder’s needs’.

Carillion’s situation has sparked this conversation once again; Frank Field (MP and chair of the Work and Pensions Committee) asked recently asked whether the ‘Big Four’ should be broken up.

The FRC stated that there were faults in a third of the accounts audited by the UK’s six largest firms over past year. They have indicated that they plan to come down hard on those companies that they feel are not meeting their obligations; unlimited fines can be charged to firms that have been found guilty of wrongdoing.

Carillion is just one of the large firms that have submitted healthy accounts not long before going under; KMPG handled Carillion’s accounts from 1999 up until their liquidation in January. Their audits will shortly be examined by the FRC, and the outcome will likely become known in a number of months.

Directors under close examination

It’s not only KPMG that are now being investigated regarding the matter of Carillion’s liquidation; company directors and senior figures will be under the greatest examination. The investigation is being fast-tracked on request from the government; wrongful and fraudulent trading will be considered closely;

Wrongful trading:

This is a civil offence. Directors will be found guilty of this where they knew, or should have realised that the firm could not pay their debts, but continued trading past this point.

Fraudulent trading:

This is a criminal offence. The difference here is that the continuation of trading is shown to be with the intention of defrauding creditors.

Personal liability can be ordered by a court in cases where a director is found guilty of wrongful trading under Section 214 of the Insolvency Act 1986. Disqualification from directorship can also be ordered on the back of this finding.

The severity of sentencing will largely depend on the director’s position at the time, indicating how much they knew about the situation. One example is that the balance sheet should be considered appropriately by the director; if they allowed trading after knowing that the balance sheet shows that the company is insolvent, they are likely to be in trouble.

In cases of fraudulent trading, the Companies Act 2006 dictates that up to 10 years imprisonment could be brought against the responsible party. Once this criminal investigation is underway, however, different rules come into play. For example, the right to silence applies, whereas within investigations of civil matters, directors do not have this right.

For this reason, early engagement with a specialised legal team is essential from the first point of investigation, if directors think there is any chance that a misfeasance claim will come against them. It is vital that all those who hold senior positions take the right steps if they are to protect themselves.

Pro-activity

Acting quickly is the key. We won’t don’t yet know whether the matter of Carillion is of fraudulent or wrongful trading, other supervisory offences or simply a case of too many risks that went wrong at once.

Stressful circumstances have been brought about for each of Carillion’s thousands of staff members, but when it comes to placing blame, the spotlight will undoubtedly be focused on the behaviour of those at the head of the company.

The prospect to these executives will be worrying, particularly those that believe they have done nothing wrong.

Whether seniors at Carillion are questioned and charged with any offences, it is the knock on effects to hundreds of companies within the Carillion supply chains that are likely to be most potent.

Our best advice to smaller companies is not to rely on one customer, however well they seem to be doing; it is the only way to protect your company fully.

Rick Smith, Managing Director, Forbes Burton