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Case Study

Carillion: High debt, mismanagement and increased political risk

By Denise H. Kenyon-Rouvinez and Philip Whiteley

14 pages

September 2019

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Reference: IMD-7-2038

The UK-based construction and services firm Carillion went into liquidation in January 2018, with debts of over £1 billion, just £29 million cash in the bank, and a pension deficit of over £500 million. It caused a scandal that was political as well as commercial. Public inquiries and a review of UK-based auditors have been direct consequences. Causes of the collapse were high debt levels, a complex company structure and low margins on large public sector contracts. The Board did not respond to the overt warnings of a major shareholder three years earlier. Just 10 months before, the annual report had given an upbeat report on the company’s position and prospects. The case study focuses on four dimensions: Strategic management – Carillion’s strategy of growth through acquisitions funded by borrowing, was high-risk. Corporate governance – The board did not challenge executives over risk or debt. Financial accounts – Aggressive accounting hid liabilities, that were missed by auditors; complacent assumptions around the valuation of goodwill were evident. Political risk – The scandal shook the assumption that private sector management was inherently superior, and nationalization gained public support in the UK.

Learning Objective

The case study provides a rare opportunity to explore the dynamics of a board that failed to identify strategic risks, and who missed warning signs, both oblique and explicit.
There are also learning opportunities around the valuation of goodwill, and auditing of complex accounts. Much detail is in the public domain, following a major Parliamentary inquiry.

Keywords

Finance, Governance, Compliance, Business Strategy, Mergers and Acquisitions, Accounting, Auditing, Political Risk, Public Sector, Outsourcing

Settings

United Kingdom
Carillion, Construction and Engineering, Services, Facilities Services
20 years, but with a particular focus on later period 2015-2018

Type

Published Sources

Available Languages

English

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