Re: Rats all of them You can hear what they have to say for themselves on Thursday, if you can stomach watching them appear in committee.
Re: Rats all of them Life, it is the opposite of your interpretation. What I am saying is that under IFRS companies can indulge (as in this case) in aggressive accounting. Not withstanding the standard you referred to, directors and auditors have (in my view) too much leeway. I am suggesting that the auditors will use IRFS standards to demonstrate they have done nothing wrong. I believe therefore that KPMG will get away with the 2016 audit of Carillion. Now should this not be the case and they are censured, then I will admit I was wrong and that IFRS cannot be blamed for the disaster.However, I remain a strong advocate of the Prudence concept.
Revenue Recognition This is from FRS102:23.17 When the outcome of a construction contract can be estimated reliably, an entity shall recognise contract revenue and contract costs associated with the constructioncontract as revenue and expenses respectively by reference to the stage ofcompletion of the contract activity at the end of the reporting period (often referredto as the percentage of completion method). Reliable estimation of the outcomerequires reliable estimates of the stage of completion, future costs and collectability ofbillings. [link]
Re: Rats all of them Using the condition that you will admit you are wrong if auditors are censured is akin to saying you'll never admit a mistake. They all sailed through the banking crisis without a blemish (allegedly!).I'll have to re-read but applying fair value to receivables/work in progress for a company like Carillion surely has/had to be what the customer is prepared to pay? These are not widgets with a million potential customers that CLLN could take and sell elsewhere.
Re: Rats all of them Life, you are missing the point. Under IFRS 'fair value' has to be what the directors think it to be; reality doesn't come into it. For example, a company buys some assets for £1 million and the current fair value is £1.4 million. But the company is in financial trouble and has to sell the asset for £800,000. A sale is agreed at that figure (£800,000) which will be completed in the following accounting period. Under IFRS rules the asset must be shown as being valued at £1.4 million as any price that is in effect a distressed price must be ignored. The Balance Sheet must show 'fair value'.KPMG will say they have done nothing wrong and merely followed accounting standards. This is why the FRC will huff and puff and will spend years investigating, but at the end of the day there will be no sanctions against KPMG. They (FRC staff) know that IFRS is toxic, but nobody in authority dare admit it.If KPMG suffer some sought of penalty for the Carillion audit, then I will admit I am wrong. Until then I am standing firm.
Re: Rats all of them If the directors had fairly valued receivables rather than inflating them with huge unbillable and uncollectable sums the issues would have come to light far sooner. That doesn't mean I disagree that accounting practices need a thorough grilling after this debacle.Auditors need to be held to account (but they likely will not).The FCA need to answer why they were not asking questions as soon as heavy shorting started. Waiting until the first profit warning to get interested was far too slow off the mark.
Re: Rats all of them Accounting has been based on three basic principles for hundreds of years and of course UK GAAP ( generally accepted accounting principles) adhered to this. These were the historical cost concept, the matching concept and, the most important of all, the prudence concept. The current accounting standards (IFRS) (Internatiinal Financial Reporting Standards) introduced in 2005 abandoned ALL these principles. Historical cost was replaced by 'Fair Value' which is merely an assessment and accordingly there was no longer a need for prudence, Carillion's directors and their auditors would have been severely sanctioned under UKGAAP, but following IFRS standards they have done nothing wrong.This was the reason that the Lloyds's Bank auditors were eventually cleared of wrong doing, The real problem (and why Carillion will not be the only company to go into liquidation after issuing a positive Balance Sheet (assets are greater than liabilities) is that the current accounting standards allow directors and auditors to make it up as they go along and do nothing to protect investors. This will always be the case unless the 'prudence' concept is re-stated, in which case 'fair value' will be consigned to the scrap heap.
Rats all of them Cochrane still in denial about the state of the company and why it went bust. He clearly thought it was all about cash flow, yet he refused to acknowledge even the sanitised position indicated in formal accounts, which themselves were rumoured (on here) to be manipulated for the purposes of year-end and covering up the truth. Any more of that reedy whining voice and I would have been reaching over the board room table for a little one-on-one about not bullshtng me while firmly gripping his tie.So he and others behind the forced resignation of Khan, more an accountant than Group FD, who smelled something rotten and decided to start digging for skeletons, called in E&Y over KPMG, but was not prepared for what to do when he found so many of them. No suprise he was not thanked by those whose turf he was digging up. Mumbling under the pressure and looking like he had been threatened. Very weak.Adam responding like an automaton as if he was under legal restraint, get him back on his own.Mercer a puppet there to do whatever the board wanted, she sounded like she was on tranquilisers, really just a credit clerk who knows everything in patronising detail but nothing of the real situation, for example who does not understand the difference between chasing cash flow problems and recognising irrecoverable losses on failed contracts.Howson trying to sound squeeky clean, Green and board chums full of apology and accountability, Horner sounded rehearsed but detached, but not one of them seemed responsible or culpable for what happened ... a board room which marshalled Carillion on to the rocks boasting of its dividend payments but no idea who was in charge on the bridge. Who was steering, Howson hiding behind Green the wrong order of things?Miasdventure or misconduct ... after all that, not sure.We will need to see the reports, memos and e-mails to know who exactly was to blame, it might take a whistleblower and anecdote to expose management and cultural behaviour. Morlers?- who endorsed Adam (Khan, Mercer in tow) to produce a series of formal accounts which were designed to bury the extent of contract losses, and to massage the appearance of the cash position in order that the board (including those who knew the real truth) could pretend to afford to keep paying a bumper dividend stream alongside other perhaps more necessary steps.- who hid the skeletons, those ruinous contracts and their unreported loss positions, despite Howson claiming an ethos of open culture clearly there was covering up going on, managers or financial reports not wanting to raise the bad news, not doing so while Howson had the wheel and Adam kept a lid on finances- who within the executive finance function manipulated the year end cash position to show a falsely positive situation, who ordered or sanctioned that deception, and how was it done under the noses of the auditors- why could the shorters and some canny investors spot the real bad situation but not the rest of us (including those fooled into holding shares, those providing continued bank support, those talked into the award of further contracts, those duped into supplying services but won't get paid)Cochrane said it ... the banks became increasingly unconvinced about who was leading Carillion, it was Cochrane himself at the death, obsessed with fixing the immediate cash flow crisis begging for handouts, while the business was truly bust and had been for a while. He was uninvestable, there was no-one in charge who the banks or the government could trust, despite some very late transfers-in.
To any ex Carillion investors Hello,Sorry for your loss but please would someone tell me if sites like short tracker gave fair warning of what was to come or was it a bit late and understated? I realise that source of the article below won't be popular but the table reminded me of previous disasters like Lonmin and Petropavlovsk. www.dailymail.co.uk/money/news/article-5348365/Infrastructure-firms-lost-investors-7bn-six-months.htmlThanks,IndyPS: the article's figure for the shorting of Interserve is double that shown on short tracker. PPS: if a trader who went short then you have banked bravely won profits I guess
Re: KPMG Chairman interviewed re Carillion: rest of interview:".....The fact that outcomes are different to those expected does not mean that those judgments were invalid at the time.KPMG pointed out the financial shortfall in July that led to the profits warning. How did this come about and why had the situation changed so quickly?We issued our last audit opinion on 1 March 2017 in respect of the financial statements for the year ended 31 December 2016. As Carillion announced on 10 July 2017, the company suffered a deterioration in cash flows on a select number of construction contracts during 2017. This led the company to undertake an enhanced review of all of the groups material contracts. KPMG agreed with Carillion to carry out accelerated audit procedures from June 2017 in relation to underperforming construction contracts. It was this review by management, following independent review and challenge by KPMG as Carillions auditor, which led to the write-down of £845m being reported relating to large scale UK and overseas contracts.I cant comment on individual contracts, but the challenges within the construction industry are well known large, long term and complex projects operating at low margin and often with a global aspect. They therefore carry significant forward risks over the lifetime of the projects. The nature of these kinds of contracts means a change in circumstances can have a significant impact on expected outturns that were previously considered to be achievable and reasonable.Does this outcome undermine the new, extended auditor report?Our extended audit report included commentary on the risk of misstatement relating to recognition of contract revenue, margin and related receivables and liabilities (and other areas of the annual report had related commentary on risks). This extended reporting provides incremental transparency and has been generally welcomed by the investor community. But it remains based on the facts as they were understood at a point in time, and as has been commented in the media, changes in circumstances can have a significant impact on the expected outcomes of large, complex international contracts.Does it justify critics of audit as a pointless, backward view of a companys accounts?Again, I think it highlights an expectation gap over what an audit does and doesnt do, and the importance of convening a multi stakeholder discussion on how we can better communicate what we do, where we add value and the future of the industry.Is this another example of a client staying with the same auditor for too long (since 1999 in this case)?No, I dont see any evidence of that. In fact I think this issue has been adequately addressed as part of the regulation governing the mandatory rotation of auditors, which states an audit firm can audit a company for a maximum of 20 years."
KPMG Chairman interviewed re Carillion: Interview with the ICAEW magazine. Predictable waffle about the "expectations gap" between what an audit does and what many people expect/want it to do. "How do you answer the questions raised about the Carillion audit, given KPMG signed off Carillion as a going concern in March 2017?We believe we conducted a proper audit, but its only right that following a corporate collapse of such size and social significance, its not only important but necessary that a proper independent investigation is performed, so lessons can be learned by all the stakeholders, from company directors, investors to our own profession. We welcome this. Without this transparency, we wont build trust in our profession.From what you know, what is your view of what went wrong?Speaking generally, organisations in the construction sector, such as Carillion, operate on low margins on complex, high-value, multi-year contracts, often with a global aspect. The nature of these kinds of contracts means a change in circumstances can have a significant impact on expected and estimated outturns that were previously considered to be achievable and reasonable.Is this another blow to the public perception of the value of audit?It is clear that despite the efforts made by the profession and regulators to better disclose the risks in financial information and explain the purpose of an audit report, the expectation gap between what an audit does and what investors and the public want it to do has widened. This is concerning. I studied the concept of the expectation gap at university in the 1980s, and yet nearly forty years on the profession is still grappling with it.Closing the gap is something I feel very strongly about. It impacts both trust in the profession and its relevance to capital markets. I am highly supportive of the initiatives such as the Audit Quality Forum that convenes a range of stakeholders to tackle issues that are relevant to audit quality and confidence in business. I am passionate about this, and believe that we can do more to understand how audit can better serve market participants and wider society. Personally I believe all of us want to be part of a better environment, build trust in our profession and learn from experience.One of the real challenges is whether or not financial statements contain the relevant information users need to make informed judgements. We have to guard against the misconception that an audit can be a crystal ball.Is the criticism of KPMGs audit of Carillion justified?I believe we need to look at the purpose and remit of audit within a common paradigm, where the expectation gap of audit is addressed. In order to achieve this there needs to be a conversation among all the invested parties over the future of audit and this will require collaboration between the profession, the regulator and investor groups.Can you understand those who criticise KPMGs claim that Carillion was strong enough to keep going for at least another three years?Yes, I can understand and have empathy for where they coming from, but its worth remembering that there were a series of risks referred to in the annual report which are directly relevant to viability. The board has to make decisions on the likelihood of these risks coming to fruition and their ability to manage them. They make these judgments in real-time, based on information available at that time, yet the decisions are normally only questioned when something goes wrong, which is always with the inevitable benefit of hindsight.The accounts are prepared at a particular point in time based on information available at that time, and even with the best of intentions subsequent developments can have a significant impact on future outcomes, particularly in relation to matters requiring significant judgment such as large, complex international contracts. The fact that outcomes are different to those expected does not mean that those judgmen
Goodwill hunting Investigations into the collapse of CLLN will not get our money back, but we might re-learn something. The committee sessions this morning were interesting in a couple of areas.Apparently CLLN and KPMG were already subject to FRC review because the regulator had good reason to question the financial reporting and audit leading to its July 2017 shock black hole announcement (shock to everyone except the Shorters and wise old heads who read between the lines). For some reason this FRC review was kept secret from private investors. A few weeks prior to the July 2017 black hole announcement no-one from finance team to board to audit committee to auditor sought to curtail the positive messages being announced about the health and prospects and debt control and dividend security of the business (chairman Philip Green, CEO Richard Howson, CFO Zafar Khan, FinCon Emma Mercer), when presumably someone knew all along there were problems buried in the shambolic accounts. The KPMG lead partner since 2014 was Peter Meehan ... the complexity of Carillion not enough to keep him busy, he was (is ?) the senior statutory auditor at Halfords. And at Cuadrilla I think. Unless he has now been told to get on his fracking bike. Plus some smaller companies like Focusrite I think. SELL.Appointed to chair the audit committee in Dec 2017 Justin Read obviously smelled something fishy, he replaced Andrew Dougal who had been in post since Oct 2011 but who was presumably anosmic and "has made a substantial contribution to the group and leaves the board with our grateful thanks". No wonder his appointment to audit committee at another company is now being resisted ... Victrex I think. If it goes through SELL.Other audit committee members. Alison Horner (Tesco - fishy accounts a theme, horse-something too?) who I think was in post still and who I think as chair of CLLN remuneration committee approved the removal of clawback conditions on executives' bonuses in the event of business failure. Time to ship out of the Tesco pension scheme? Ceri Powell (Shell executive VP of International Exploration) stood down in Mar 2017 after three years ... not replaced until I think by the super optimistic Alan "We came close to bailing out Carillion" Lovell in Nov 2017.The other concern to take away which so many companies base their viability on ... the intangible asset called Goodwill. Worthless when a business does not perform. How many of your investments are "secured" on Goodwill. Have a look. Very very frightening.
NEW ARTICLE: Sterling surge and why US politicians are hurting the FTSE 100 "Donald Trump joins Theresa May in Davos today, the first US president to hit the frozen Swiss town since 2000. Criticised as an exclusive but irrelevant talking shop, both Trump and May are quite capable of moving financial markets with comments ..."[link]
Re: Investors were misled Meanbugger, I am in no way feeling sore because as Carillion failed my basic tests for (at least) five consecutive accounting periods there is no way I would have invested in the company. I agree that an expanding company will need to increase its working capital. The test for this is 'stock days' and 'debtor days'. Even for an expanding company, debtor days should not increase, while a stock days increase should be limited. Even for an expanding company, the basic test I describe should not fail, as an expanding company should be generating more operating cash.As I have said many times before, profits without cash generation is suspect. As for IFRS accounting, it is more easily manipulated than UK GAAP.
Re: Investors were misled FWIW I think numberbiter is justifiably feeling very sore and is blaming the accounting and Carillion's weak balance sheet. However I think when looking at an investment you must first look at the overall business. Is it a good business to be in with prospects of increased profitability and genuine creation of shareholder value. For me Carillion with its construction activities in Qatar and large low-margin contracts would have failed on this basic question. Numberbiter says 'If cash inflow from operating income' (cash flow statement) is lower than 'net income' (Income Statement) DON'T INVEST and if already invested SELL.' I think this is being over-cautious. You must look at the reasons behind the balance sheet absorbing cash. A growing company is likely to need more working capital. Investors should look at that growth, is it worthwhile or in Carillion's case just chasing contracts to squeeze cash out of sub-contractors. I think some of the best investment opportunities actually are when the balance sheet and cashflow weaken because of an upturn in business, launching new products etc.The key to successful investment is to back successful companies who can exploit their marketplace to make good and growing returns for shareholders. Fixed rules like numberbiter's may actually see you missing out on a ten-bagger if everything else is pointing in the right direction. At the end of the day investors have to do their research and particularly read the notes to the accounts to try and glean as much information as possible to form their investment decision. Making money from shares isn't easy but it's a lot better than working for a living.