Lupo di mare
20 Jan 2018
Re: Investors were misled And here's a bit more, courtesy of the beeb:-"Carillion's collapse was for many people a bolt from the blue - a large UK company that had no obvious problems went bust in a little more than a year.Even the company's directors seemed to have no idea what was about to happen. In the annual report published in March, they signed off a "viability" statement saying there was no reason to think the company would have financial difficulties in the next three years.Outside the company, however, there was widespread scepticism.Investors had begun betting against Carillion shares as long ago as 2013.Six months ago, at the height of the City scepticism, one quarter of all the company's shares were being used in "short" trades, an unheard of proportion for a large quoted company.One hedge fund manager complained at the time that the trade had become so popular that it was no longer worth doing - the cost of borrowing Carillion shares, normally the necessary precursor to placing a short trade, had become prohibitive.What did the short-sellers see that the company's board could not? Here are four of the tell-tale signs that (with hindsight) gave hedge funds and others sufficient confidence to bet that the company's shares would fall.It's too good to be trueCarillion reported average margins of about 4%, twice the normal going rate for construction companies.While some of this could be explained by the company's mix of business, with potentially lucrative service contracts and high-margin work in the Middle East, it seemed suspiciously high to some investors.And high-margin work is good, as long as you actually receive payment. Industry insiders say Carillion was owed about £400m from Middle East contracts when it went under.Longer payment termsConstruction industry veterans know that when main contractors come under pressure, their first port of call is making subcontractors wait for their money.Late payment is endemic in construction, but Carillion was making its suppliers wait 120 days.There was other evidence too; stories in the trade press about the woes of angry subcontractors, which enough to give keen-eyed hedge funds reason to think that cash was tight at Carillion.Debts may have been larger than most thoughtCarillion had plenty of debt - about £850m at the time of its last annual report - although this had grown much larger by the time of its demise.But that figure did not give a full picture. To help speed payment to its subcontractors, Carillion, in common with other large contractors, used a system called the Early Payment Facility.Its suppliers could take their invoice to one of Carillion's lenders and be paid. The bank took a fee, and Carillion no longer owed the subcontractor, but the bank.This sum was not included in the published debt figure, but was in the accounts under a different heading - if you knew where to look.A new regime comingAll companies that have long-term contracts have to wrestle with the tricky question of when the profits should be recognised in the accounts.If they abide by the actual flow of cash from the deals, then the results would be very lumpy, with big losses early on followed, hopefully, by profits in the final years.Accounting rules allow companies to smooth the profits out, but it is a matter of judgement. If the judgement is too optimistic, profits can be booked too early.The accounting rules are changing, with a new standard (IFRS 15) coming into force this year. It will force companies to be tougher, matching reported profits much more closely to actual cash flows.It is not an unreasonable assumption for a hedge fund that the new accounting standard would be likely to hit Carillion's reported profitability.It is worth remembering that the investors were betting only that the share price would fall.Most probably expected that - as had happened with Carillion's big rival Balfour Beat
numberbiter
19 Jan 2018
Re: Investors were misled FRTEB,You ask what can private investors do to avoid investing in the likes of Carillion. As an accountant, I can help you:If 'cash inflow from operating income' (cash flow statement) is lower than 'net income' (Income Statement) DON'T INVEST and if already invested SELL.Take out 'Intangible assets' out of the Balance Sheet and if it then goes negative (liabilities exceeds assets) DON'T INVEST and if already invested SELLAdd 'other creditors' to net debt and calculate 'total net debt per share' Deduct this from EPS. If then EPS goes negative, DON'T INVEST and if already invested SELL.A failure on any one of the above three is a warning not to go near. Carillion failed all three. The writing has been on the wall for years, liquidation was certain; the only question was when.Finally, don't trust audit reports; sometimes they are not worth the paper they are written on .Remember also, that IFRS accounting (as compared to UK GAAP) made it much easier for directors, if not to falsify, then to bend accounts. For example, under UK GAAP intangible assets had to be amortised over 20 years. Under IFRS amortisation (if at all) is at the discretion of the directors.I agree with you that the law needs to be changed. Carillion's senior directors and the audit partner signing off the 2016 accounts should be behind bars. Investors who are not financially trained are being taken for a ride.
FRTEB
19 Jan 2018
Re: Investors were misled I'll raise my head above the parapet and say I feel I was misled or for want of a better word, conned. The accounts were nothing short of fraudulent. This was a FTSE250 company with a long track record and accounts that were signed off by auditors. Carillion wasn't a dodgy backstreet casino, but it may as well have been. If a private/retail investor cannot rely on a set of audited accounts from a large company listed on the main London Stock Exchange then how in hell's name are we supposed to be able to evaluate a company and make informed investment decisions? I'm not talking about rich investors here (in case the media read this). I'm talking about people who invest for the long term to supplement a pension or even in place of a pension. The FSCS covers us (up to £50K) for wrongdoing by a nominee but what about wrongdoing by a company? Who loses when wrongdoing takes place then? Us - all of us - whether direct investors, via a pension scheme or as a result of being a taxpayer, it seems. It is in everyone's interest to try to ensure this does not happen again, although in reality it will of course. Why? Weak and inadequate regulation, totally ineffective monitoring (auditing) and no real deterrents for directors, senior managers or auditors, because most of them get away with it. So what will the FCA do? I'll wait and see (can't do anything other) but for me nothing short of prosecutions for the directors, at least, will be good enough. I say 'at least' because senior managers must have also been complicit in the deception, and what the auditors did, or more to the point didn't do is in my opinion nothing short of criminal. A good few lengthy prison terms is what is needed in order to send a clear message out. That would be a good start. Me personally? £6.5K total loss if I include dividends. Much more if I don't, so I won't.
Kenj2
19 Jan 2018
Re: Investors were misled Numberbiter,It is not just the liabilities that are distorted in Company accounts.Carillion's assets were swelled by £1.669bn in supposed Intangible Assets.Allowing £1.669bn to be deducted from the real debt and liabilities, to produce a positive Net Assets figure of £729.9m.If Carillion actually had assets worth anywhere near £1.669bn they could have sold them and staved of liquidation.These Micky Mouse, made up, Intangible Assets figures are just as big a problem, when trying to value a company, and unless I am wrong they have been there well before IFRS.
Graham Morrice
18 Jan 2018
Re: stable price Pity the horse has bolted.
numberbiter
18 Jan 2018
Re: stable price I would take bets the iii' price will remain stable for several weeks. Indeed it is likely to do so until Carillion is deleted altogether.
WhoSparticus
18 Jan 2018
Re: stable price and who would contradict them?
cooperboy
18 Jan 2018
stable price well at least according to iii the share price has been stable for the last 4 days!
S17
18 Jan 2018
Re: Capital loss Thanks numberbiter! When this one bombed, after I'd sold but still at a loss, I briefly thought I'd offset some nice gains. Sadly all my biggest current gains are oustide the ISA and CLLN was inside.Should have spotted the warning signs earlier and acted sooner.
numberbiter
18 Jan 2018
Re: Capital loss I pity those who have Carillion in an ISA.
bazonka
17 Jan 2018
Re: Capital loss so now they are suspended you just report a "negligable value claim to hmrc".You can then use the registered loss to offset a gain when you make one, which can be at any time in the future taht you make a gain that puts ypou over the tax free limit
macbonzo
17 Jan 2018
Re: A sad day I remember I was sitting next to a Chinese chap as some HSBC Premier hospitality do. He told me that more money is gambled in Macau in one night, than in an entire week in Las Vegas. I would never underestimate the Chinese - they are ruthless capitalists and work harder than anyone else
shabby 2 sox
17 Jan 2018
Re: Investors were misled numberbiterI totally agree with you. Equally misleading is the excessive length of annual reports. Looking at Carillions 2016 annual accounts it is a mind numbing 151 pages long full of guff from the executives with the single aim of justifying their high pay and obfuscating growing problems. All investors, creditors and lenders are really interested in are the numbers, clear notes and analysis with explanation of material changes and a believable auditors report.All the rest should be in a separate report if at all necessary. Luckily I sold my Carillion shares the day before the referendum result only because I thought they would be impacted by a leave vote.
casabanker
17 Jan 2018
Re: A sad day Hello SS18,I always welcome stock purchase suggestions so thank you for that. I do not tend to buy on exchanges other than the LSE due to the added complication of currency exchange. Although recovering at the moment, particularly against the dollar, the gbp tends to be a weak currency which is good for dividends from foreign stocks but poor for purchase of them. I don't know if I could buy them directly through the ii trading platform. I expect that I would have to place a telephone order. The stocks I hold in India, Macau and Vietnam are all funds so the risk is well spread. India is growing by over 6% each year and I hold the India Capital Growth Fund. The Macau Opportunities Fund is an investment in property intended for hire or purchase mostly by Chinese punters attending the well known casinos. Gambling casinos are forbidden in most places in mainland China. The Vietnamese Opportunities Fund, operated by Vinacap has shown excellent growth over the last two years due to a young, well educated workforce and low wages. Some big Companies ie Samsung have moved operations there to take advantage and improve profit margins. All three are listed on the LSE and easily bought and sold on the ii trading platform. Casa.
II Editor
17 Jan 2018
NEW ARTICLE: Six red flags which tell you it's time to sell "News this week that LSE:CLLN:Carillion had gone bust probably came as little surprise to its weary shareholders. Last year the construction and support services group saw its valuation spiral from £1 billion to £100 million as its problems ..."[link]
