Insolvency and Carillion (Part 1)

Carillion Insolvency

I’ve decided to create a 3-part series on Carillion and the hidden goings-on in the accounting world. This is part 1, where I look at the insolvency process. You can read Part 2, on Carillion’s accounting here. You can read Part 3, on the ongoing investigations and aftermath here.

Sex sells. And at the moment, so does laying into accountants. I can’t open the FT or The Times without seeing an article criticising the accountancy profession. Just like banker bashing around 10 years ago, it’s the ‘in’ thing. It’s what the cool kids are doing.

There’s a lot of truth in what’s written. There’s also a lot of hyperbole. There’s also a lot of stuff that is downright wrong.

In particular about insolvency.

In the aftermath of Carillion, I’ve seen people claim there is no insolvency regulation – not true. That secured creditors get paid before the costs of winding up – wrong. Imagined conflicts of interest. And most bizarrely of all, complete ignorance of the involvement of the High Court in insolvency proceedings.

There are problems with insolvency, but these are lost among some of the ‘fake news’ put out there.

How do I know this?

I’m a Chartered Accountant. Not one of those ‘useless’ auditors or ‘thieving’ insolvency practitioners (who don’t have to be accountants by the way). I’m a forensic accountant, the guy you call when the shit has really hit the fan.

I’ve no love for auditors. My heart would sink when my colleague would say: “the X plc audit team needs a hand”. Likewise, when a restructuring came up I’d try to hide lest I get dropped in an alphabet spaghetti of accountancy chaos.

That’s why I’m writing this post. Because I’ve seen first hand what happens in insolvency, and it isn’t like what’s reported in the MSM.

Insolvency and Carillion

Over the past few weeks, I’ve been particularly irked by some of the stuff written on the Carillion insolvency. Whilst lots of writing lays into Insolvency Practitioners, the true ‘bad dudes’, Carillion’s management slide away into obscurity.

So I’m going to run through the Carillion insolvency process.

First off, this is a liquidation (wind-up by the Court). There are four types of insolvency process: CVA, administration, liquidation and receivership. Each is different, each has several different sub-types. But I’m not going to talk about them (at least not today).

What is happening with Carillion

Carillion went bust. It couldn’t pay its debts. At that point, it stopped trading and went to the High Court asking to be liquidated. The High Court heard the petition and said, yes, you should be wound up.

The Court then went off to the Government’s Insolvency Service (IS), asking them to nominate someone to take charge of the liquidation. That person is the Official Receiver (OR). They are a civil servant, salaried by the Government.

The Official Receiver

The OR asks the Court if they are fine with them being in charge. Hopefully, they say yes.

The ORs job is to oversee the liquidation process. They are ultimately responsible. They must ensure an orderly wind up, try to get as much money for the creditors as possible and investigate what went wrong.

The ORs first job is to work out if they need help. That is, whether they need to get an Insolvency Practitioner(s) (IP) to aid them with the liquidation.

The Special Manager

In the case of Carillion, the largest ever UK liquidation, the OR clearly needed a lot of help. So he opened a process to find and select a suitable helper called a ‘Special Manager’ (SM). There are rules about when the OR can do this and he had to ask the Secretary of State for approval.

The OR negotiates with the possible IPs to find the best one for the job. With Carillion, the OR selected PWC (a firm with a very good restructuring team and having managed on the previous largest-ever insolvency). [p.s. I worked for two of PWC’s competitors so I’m by no means a fan.]

Together, the OR and PWC would have sat down to agree to fees and a plan. They would have gone through this plan with the largest creditors, the Pension Protection Fund (PPF) and the Government. When everyone was happy, the OR then asked the Court to approve the appointment of PWC (including their fees and the general action plan).

Work begins

Now the real work begins. PWC’s principal role in the first week is to stabilise the company. Carillion would have been in carnage. They would have taken over operations with three major aims: protect the companies’ assets, save people’s jobs and get the company working again.

Once things have stabilised the OR and PWC will start working through their plan. Generally, this is:

  • Work out what assets can be sold and for how much;
  • Work out what onerous contracts can be escaped from; and
  • Gather evidence to investigate any wrongdoing.

Let’s look at each of these for Carillion.

Assets

PWC will find Carillion’s most valuable assets and try to realise them. It’s a tricky process where good IPs come into their own. On the one hand, the liquidator wants to get as much money as possible. On the other, every day that passes means the costs rack up. It’s about finding the right balance, some of the top IPs are the quintessential wheeler dealers – making money that nobody thought was there.

To make sure the creditors aren’t being screwed, Real Estate experts, asset valuers and business valuers (like me) carry out independent valuations of major assets. The OR will oversee this and check they are happy with what the IP is doing.

Onerous contracts

Carillion was losing money for a reason. It had entered bad deals. PWC and the OR will be looking to get out of the very worst ones. They will negotiate fee reductions, scope reductions or simply get out (sometimes through litigation). In many cases, Carillion worked in partnerships. PWC would look for the partners to take on work as quickly as possible to save costs.

Investigation

The OR will be looking for wrongdoing at Carillion including Fraud, Fraudulent Trading and Wrongful Trading. If they find evidence, they will ask the Insolvency Service to bring action. This is the most difficult part of the job and requires lots of specialist skills (I’m biased as a forensic accountant, little-known fact: forensic accountants are the smartest and best-looking accountants).

The OR will ask forensic accountants to pore over Carillion’s books and IT systems to see if bad things were going on.

Unfortunately, this is a bit like finding a needle in a haystack. There will be trillions of bytes of data. Billions of accounting transactions. You’ll find something that looks odd, start tracing, only to find it was innocuous or a simple error later corrected.

Proving fraud is incredibly difficult. The bar on proof is very high for criminal convictions – mainly because we don’t want to send innocent people to jail. The reality is, most of the time there isn’t enough evidence. That said, the Insolvency Service strikes-off 1,000s of directors each year.

The work

The work is front-loaded, the most costs are borne in the first few months. This was the case with Carillion. PWC and the OR expected most work to be complete after 4 or so months. Most liquidations last around 6 to 12 months. The final months dominated by wrapping up the investigation and tying up loose ends.

The SMs are required by industry standards to update the OR of work progress at least monthly. Most of the time, updates are far more frequent. Given the complexity and size of Carillion, these updates were on a daily basis.

In these appraisals, the OR will be reviewing and agreeing to PWCs work. He’ll be saying if it’s good enough or not. He’ll monitor the direction of work and decide if there are particular areas he wants PWC to focus on. If he ain’t happy he’ll tell PWC. Remember it’s the ORs neck on the line.

If necessary, the OR will petition the Court. Seeking permission to change the process, increase or vary fees or update the plan. If the Court isn’t happy, is says no.

The OR also must produce a report for the creditors. Often, the OR and liquidators will keep creditors up to date on a more regular basis (unless the creditor opts out of such communication).

Denouement

As Carillion is wound down, the OR will get a better idea of the assets left for creditors.

Assets are paid out in a specific order BY LAW:

  1. Expenses of winding up: Liquidator fees and expenses are paid first
  2. Secured creditors with a fixed charge.
  3. Preferential creditors and ‘prescribed part creditors’.
  4. Secured creditors with a floating charge.
  5. Unsecured creditors.
  6. Interest on debts.
  7. Shareholders.

To reiterate it’s by law. You might not like it, I might not like it. Tough.

Order of fees

The OR is paid first. Their fees are paid to the Insolvency Service and are set by law: 11,000 per liquidated company plus 15% of recovered assets. As at the end of March 2018, the OR’s Carillion fees were £297k (£11k x 27 liquidations).

Next in line are the costs of the wind-up. The IP and SM’s fees, the running costs of the company during wind up.

This order is for a specific reason: if you aren’t gonna get paid you won’t do the work. This applies from accountants, to the building staff to the cleaners. If these people aren’t paid, they won’t work. If we didn’t have liquidators and staff doing work the wind up would be disorderly, more jobs are loss and less money recovered.

Next up are secured creditors (aka banks). They lend money but in return get collateral. Just like your mortgage. The deal is, you get a lower interest rate, in return, we get your house. That’s one of the reasons why loan interest rates are higher than mortgage interest rates.

Unfortunately, there’s rarely any money left after paying the secured creditors. That’s not because they gorge themselves on money, it’s because companies go bust because they were rubbish at business (or due to fraud).

Sadly in the case of Carillion, there isn’t even enough money to pay the expenses of wind up. Instead, the Insolvency Service will be picking up the tab. And therefore, ultimately, the taxpayer.

Petitioning the Court

The OR will set out the assets recovered and ask the Court for permission to distribute the money.

If the Court doesn’t like it, they tell the OR to go back to the drawing board. This sometimes happens, especially in administrations if the Court thinks the deal is a ‘bit dodge’ (very technical term there).

Once approved, the OR consults the lists of creditors drawn up during the liquidation process. This is generated as information is found and from creditors petitioning the OR.

In the case of Carillion, the list looks like this:

  • Insolvency Service
  • Nobody else

The report

As mentioned above, the OR has to investigate what went wrong. They will produce a report for the Insolvency Service explaining this and recommending actions against the directors of the company if necessary.

Most of the time, this will be a recommendation to strike off the directors. Where fraud is thought to have occurred the Secretary of State will consider whether to bring any civil action. In the most egregious of cases, the file is passed to the Crown Prosecution Service to consider criminal fraud charges.

A quick work on this. Criminal fraud is very very hard to prove. We only send people to jail if we are sure they committed a crime (beyond reasonable doubt). Unfortunately, proving fraud to certainty is hard. It means very few ‘bad dudes’ get nailed for fraud. I could write mountains on this. If there’s interest I can write a piece on that (this one is long enough already).

An unhappy story

Companies going bust sucks. It is terrible. People lose jobs, businesses go under. Nobody can turn back time to stop it from happening. All we can do is to put a system in place to make the best of it.

I share huge sympathy for the victims of Carillion. It’s upsetting what happened. I can’t bring their money or companies’ back. But I can try to shed some light on what’s going on. That’s why I wanted to write this piece. Free of the bullshit, to explain exactly how the process works.

So let’s turn to our final question.

Is the process up to scratch?

In many respects, yes. In some important respects, no. The process above sounds great, and it works well. But there are some problems.

A long-winded process

Firstly, as you’ve probably realised the process is quite long-winded with lots of back and forth. The idea is to prevent mistakes from happening, but often the process takes too long. A litigation culture has emerged making IPs very reluctant to speed through the process. This means extra costs and a longer wait for money. I don’t have an easy solution for this. But many much smarter people than me have repeatedly asked the government to look into it.

Austerity has hurt services

Secondly, the Insolvency Service and Courts have been savaged by cuts. Things aren’t as dire as in other areas, but they are expected to do more with less. Talent has ebbed away into the private sector and there is a lack of resources available. They are doing the best they can and put on a brave face, but it’s hard. I wasn’t around in the ‘good old days’ when the Insolvency Service was a Goliath, but today only the simplest cases can be managed by the OR alone. That’s all a political choice. I don’t think we should be outsourcing justice and the law to the private sector, but successive governments don’t agree.

Small Creditors aren’t engaged with

Recovery rates and efficiency in the UK is relatively high compared to other countries, but with a concerning downward trend recently. But this hides an uncomfortable truth. Insolvency is dominated by big creditors – typically banks. Engagement with, and by, small creditors is very low. That’s understandable due to basic economics, but we can do better. Other countries have created professionals that represent the collective interests of small creditors in insolvency. I’d like the same here, with an automatically appointed professional to represent SMEs alongside the OR. The job might be like herding cats, but it’s better than nothing.

Lots of regulation doesn’t mean good regulation

Next up is regulation. Insolvency is probably the most highly regulated industry in the UK. The Insolvency Act 86, Insolvency Rules 2016, Insolvency Amendment 2017 are (erm…) ‘comprehensive’. IPs answer to the Insolvency Service, the Courts, the law and their professional bodies (accounting and law bodies).

Trouble is, nobody knows who should be policing what. The Court steps in if things go badly wrong, but most of the time it falls to the professional bodies. They treat discipline seriously (or at least my body, the ICAEW does). But whenever they ask for more powers they get rebuffed. This has been going on for years. I’ve found articles where the accounting bodies asked for more powers a decade ago. If I had to guess why, it’s because the government wants to keep power for themselves. Politicians want it under their control. Unfortunately, they just mainly grandstand rather than actually doing anything. In my opinion, it would be better to have a single regulator given stronger powers to ensure higher standards. [edit: just read now that ministers are considering giving the Insolvency Service some tougher powers! Good news if true.]

Fees are misunderstood

Fees are another issue. Recent changes mean that fee estimates have are published upfront. Trouble is, it’s impossible to accurately gauge fees. Sometimes the liquidation is straight forward, sometimes there’s been wholesale fraud. As such, for fear of not recovering costs, IPs quote the top end of fees, lest they have to go begging to the Court. Likewise, they publish the highest fee rates, just incase they have to seek the specialist expertise of the only world expert on Mongolian Salt mines. These get quoted in the press, everyone gets upset. But the fee rates I’ve seen are the standard City rates for professional services firms. They are dictated by the market. Being upfront with fees has increased transparency but caused confusion and disquiet. The Insolvency Service needs to improve the way it communicates the insolvency process to the public.

Too much in one go?

Finally, there is the investigations. This is an increasingly complex part of the process. Public expectations are for no stone left unturned. Unfortunately, this distracts from recovering assets. It would be much quicker to get the asset recovery done first and get people paid as quickly as possible and leave the bulk of the investigation work for later when it can be given more time and done properly.

To some extent, this is already the case. But the public demands (unrealistically) to know what went wrong almost immediately. It takes time to do a thorough investigation and I really urge more patience. I think its imperative of forensic accountants, like myself, to communicate better what work is required to properly perform the investigations.

TL:DR

With Carillion:

  • The Official Receiver, a civil servant, was appointed by the Court
  • He answers to the Court
  • He chose PWC to help him
  • They set out their fees and liquidation plan at outset and got court approval
  • Carillion is such a mess that the Official Receiver won’t get full fees, the taxpayer will have to foot some of the bill.

Specific problems with UK liquidation process:

  • The process is long-winded.
  • Cuts in services means Court and Insolvency Service deprived of money and resources needed to provide good service.
  • Low engagement with SMEs, we need professional appointed by Court to represent SMEs.
  • Consolidate regulations and bodies that regulate Insolvency Practitioners. Grant them stronger powers to punish bad Insolvency Practitioners.
  • Publishing fees has brought transparency but also confusion. More education required.
  • Splitting asset and recovery will speed up the return of money and improve investigations.

You can find out more about insolvency from the .gov website:

https://www.gov.uk/government/publications/options-when-a-company-is-insolvent/options-when-a-company-is-insolvent

https://www.gov.uk/government/publications/claim-money-back-from-a-bankrupt-person-or-company-in-compulsory-liquidation-guidance-for-creditors/claim-money-back-from-a-bankrupt-person-or-company-in-compulsory-liquidation-guidance-for-creditors

This is Part 1 of a 3-part series on Carillion and the hidden goings-on in the accounting world. You can read Part 2, on Carillion’s accounting here. You can read Part 3, on the ongoing investigations and aftermath here.

All the best,

Young FI Guy

P.S. Don’t worry, I’ll be back to ‘regular programming’ soon, I just had to vent.

P. P. S. As always, I moderate comments. If you post abusive comments like ‘accountants are scum’ I won’t approve them. Constructive comments are always welcome. I’ve tried to get all my facts right, I’m sorry if I got anything wrong. Be nice!

21 thoughts on “Insolvency and Carillion (Part 1)

  1. I’d be interested in your views, as an expert, on Beaufort Securities, where is was claimed that investor funds, thought to be ring-fenced, were taken for fees, as the £100m quoted seemed very high.

    1. Hi John, great to see you drop by. There was an update on Beaufort recently (link) and it was very good news. The fees are likely to be in the region of £55m, well down on the £100m. As I mentioned in this post, liquidators are worried to quote anything other than the max fee. In particular with Beaufort there were big concerns about potential criminal actions in the US. The other thing was whether investors would lose funds, I never thought this would be the case, and the FSCS would pick up the tab, it was just a case of negotiating between the liquidator and them and the FCA. On that front, it seems like all that was sorted (link to This is Money article).

      I was reading back a comment of mine on Monevator at the time this started, and it seems I didn’t say anything too stupid:

      “Having read the PWC statement the £100m comes across as a worst case estimate. I say that, because they use the same kind of wording I’d use when pitching for work. The worst thing to do in contentious work is under-price and then things go wrong and you tell your client fees have doubled. They quite rightly get upset!

      The fee itself seems at the high end (but I have no idea what work is envisaged) but an overall cost of high double digit millions wouldn’t be too surprising from my experience. Asset tracing is notoriously laborious especially when potential illegality is involved. Unfortunately, this won’t be as straight forward as going to a register, pressing a button and everything being transfered.

      Unsurprisingly, when firms go tits up you find that lots of the controls and processes they were using were not being followed or were substandard. Another issue is that the people who know how it all works are usually long gone, left under acrimonious circumstances and are very reluctant to be dragged into a mess they had no part in. It can take dozens of people to replace the work of one person.

      The insolvency process also involves a high level of accuracy and precision. The insolvency practioner (IP) will need to engage specialist lawyers and (given the legal issues) counsel. They will need to get valuations of assets and then independent valuations to assess the appropriateness of those valuations. They’ll need to get other teams at the firm to manage operations and the sale of assets. All these things have to be done properly to ensure the integrity of the liquidation process. And they all cost a lot of money.

      Finally on terms on who pays the costs. It is a minefield. By law the IP gets paid first. That’s sensible because otherwise nobody would take on this kind of work. The unfortunate thing here is that there isn’t the non-client assets to pay for it. So that leaves those assets as the only means of paying for the insolvency. PWC have been (deliberately?) coy about how the costs have been allocated. That’s probably because there have been very long discussions about how much of the tab the FSCS will pick up. I imagine the FCA has said you leave the small asset holders alone – that way they can get paid quicker and the taxpayer won’t have to foot the bill for them. Unfortunately that means the cost will fall on person’s with larger holdings. That decision won’t have been taken lightly. In fact that’s probably what a huge amount of work so far has been on.

      I’m no shill for the restructuring industry. But be assured that these guys are professionals and will be working very hard and doing their best. It’s a rubbish situation and supports why you should be prudent and spread money across brokers. Those familiar with the icesave saga will know it’ll take a long time to resolve but I hope it will work out OK for as many clients as possible.”

      [edited to link to press release from PWC and This is Money article].

      1. Just to add, sorry, the FSCS has said only 10 investors will be out of pocket. That, of course, is good news that very few people have lost out. But I do feel sorry for the 10 individuals who have likely lost a lot of money through no fault of their own.

      2. Thanks for the very detailed response. Its good that there is regulation, as while I can see why the IPs must be paid its never easy if the owner of the funds isn’t in control of how they are used.And as a small fish, I can appreciate the burden going on bigger ones!

        1. You’re welcome John. It’s something I only realised a few years ago when I had a project and saw how many intermediaries there are. There’s at least 5 intermediaries between a saver and their investment. This saga has highlighted some of the problems in the nominee account arrangement. We’ll have to see if anything is done about it.

  2. I watched the dispatches programme on Carillion. It is amazing that the debt that exists in this world allows everything to function – and even with shed loads of taxpayers cash – eventually the Ponzi scheme can collapse. Hell, even Wonga can’t stay afloat!
    It would make you think that if we can’t even build our own schools and hospitals in a sensible manner, then the UK’s expertise in engineering (or just doing things) is woefully inadequate for the 21st Century’s challenges.
    (by the way – Carillion involved in the Aberdeen by-pass – drove passed it this morning, still not open years after promised, years after it was needed too! – costs

    1. Hi GFF, good to hear from you.

      I watched the programme too. As these types of documentaries go it was pretty good, though still too much sabre rattling for my taste. That said, the commentary from Frances Coppola and Sir John Bourn was spot on. (In fact, it was Frances’ even-handed reporting that gave me the confidence to write this article).

      I’d like to write about the Carillion accounting but it would be some endeavour and I feel I tax my readers enough with posts like this!

      1. I like Dispatches.

        The problems with Carillon are that on the one hand, shareholders expect ever improving performance and executives don’t want to disappoint.

        What I’m concerned for is that I hold investments in Infrastructure trusts like HICL – are they fundamentally a bad bet long term? I’m holding this as a good dividend for the foreseeable future.

  3. Hi YFG, really interesting post! Would be really interested in more like this, even if you feel you’re just venting, it’s brilliant to get some understanding of processes that currently seem like shady handshakes between fatcats in boardrooms!

  4. I have no dogs in this particular fight but just wanted to say I really enjoyed this, thanks for taking the time to explain a very complex situation. I certainly would like to know more about the fraud element that you eluded to as well.

    1. Thanks LALILULELO. I’ve been wanted to write about financial fraud for a while, it’s just something I need to think carefully about so it isn’t too dull (people write books on the thing!).

  5. Constructive comment: “The OR will ask forensic accountants to pour over Carillion’s books …”

    Wot, vitriol?

  6. Great article and a good summary of the process. It really is a can of worms eh?

    My main problem is that I have to say the fees charged by PWC et al are obscene. Yes we all require payment for our labours but as you mentioned in your piece the complexities in such a large organisation are indecipherable and ‘purposely’ weighted in the interests of protecting the board and senior management in the event of an investigation. Some of the support staff sent in to assist with the investigations of large firms are billing upwards of £550 per day!

    I currently live in Merseyside and the cost of living is minimal compared to a lot of other regions however I was asked by a friend who works for EY to apply for a role to join a project team working within the NHS on Merseyside at £405 per day as a contractor! The contract was an audit based contract headed up by EY who no doubt billed somewhere nearer £1000 per day for the Project Manager role advertised (I didn’t apply). This is tax money taken from the supposedly underfunded NHS (it isn’t underfunded it’s just terribly managed and extremely wasteful). Those fees shouldn’t be on offer in the public sector even in central London.

    I agree the bar to prove beyond reasonable doubt needs to be set high to prevent false imprisonment however in finance there is the SMR (Senior Manager Regime) whereby an individual is liable to be prosecuted if their department fail to adhere to FCA requirements. Naturally not a single manager has gone to prison following the countless examples of severe mismanagement and fraud committed on their watch, (HBOS Reading one example) but the law is there if needed.

    Carillion is/was a massive company with a turnover that rivalled the GDP of some small countries. They were supposedly audited annually by external accountants (the same big 4 that are called in and paid massive amounts to investigate wrongdoing) therefore how can a company with so much compliance, regulation, auditing and civil service scrutiny due to the amount of public works being undertaken by them, suddenly open their current account one day and be confronted by the equivalent of digital moths?

    Non-Executive Directors (handsomely remunerated), internal accounts personnel, finance officers and the apparently astute Chairman of the Board can not in my view stare a judge in the face and say they were unaware of the state of Carillion’s finances. WHEN the investigation finds no case for criminal behaviour there should be a process in place to hold board members and senior management to account by way of personal financial penalties. Just think of the amount of free shares, expenses, entertainment allowances etc swallowed up by the cartel at the top of the Carillion tree over the past 5 years or so. Assets should be frozen and a settlement agreement decided on by a court. That would send a clear signal to the remainder of the seemingly untouchables currently sitting on the boards of other companies, especially ones entrusted to deliver public works using tax payers’ money.

    Thanks

    1. Hi Tony, great comment thank you for posting. You raise so many good points, so I hope you don’t mind a nice long reply!

      In terms of your last point about the investigation, I’m thinking of turning the Carillion story into a three-parter, with Part 2 on some of the accounting and Part 3 on the potential civil penalties or criminal charges that can be used through our legal system, along with what we might expect to see.

      The fees are a tough one. On the one hand, it’s a lot of money, but on the other, it’s the going rate for professional services work.

      For the Carillion work, PWC have publicly posted their average hourly rates:

      Partner 648
      Director 559
      Senior Manager 406
      Manager 334
      Senior Associate 260
      Associate 166
      Support 92
      ClientAccountSupport 68
      Other 54

      They also set out the rates of their most expensive team, the Pensions specialist team:

      Partner 1,156
      Director 1,060
      Senior Manager 815
      Manager 482
      Senior Associate 412
      Associate 152

      Those rates will seem like an awful lot to people who earn £7 an hour. But there are a few things to bear in mind. Firstly, a high-risk restructuring job is one of the most difficult a firm like PWC would take on, so these rates are towards the upper end for professional services work. Likewise, the changes to the insolvency act mean insolvency practitioners have to estimate fees upfront. This has had the unintended consequence of all firms estimating high fees, in case they take on the work only to find they’ve massively underestimated the cost.

      But these, rates are not way-out for this kind of work. For example, when I was working I’d be charging myself out at around £300-400 an hour depending on the project. Which is about in line with what PWC are charging. The pension team rates are very high – and conveniently the ones quoted in the media – but this kind of work is incredibly complicated (Carillion is also a particular mess as well). Those level of fees are what you are looking at for the top actuaries and pensions lawyers.

      I don’t particularly like the per hour charging model, and I would always try to give my clients a rough idea of the total fees for a project. No doubt PWC will have done the same with the OR (in fact, the OR says as much). The OR would also likely negotiate fee reductions and likely soft caps on various stages of work (again he said as much). For example, the cost to wind-down contract Y might be £Xm. Unfortunately, that kind of thing isn’t publicly made available. Most obviously, because it will be an on-going negotiation as work is completed. A lot of journalists and academics who’ve never worked in industry or the profession don’t understand that. If you’re breathing, you’re negotiating fees.

      It’s also important to bear in mind that those rates include all costs. For example, as a forensic accountant, the general rule of thumb I had for the first look on contracting charge-outs was 30/30/30/10. 30% of the charge out rate are fixed costs like property, insurance, utilities etc. 30% are variable costs such as software, materials, expendables, 30% are total employment costs, salary, NI, tax, pension and 10% is margin. Each would vary by around +/-10%, so generally speaking the ‘profit’ on the charge out is around 10-20% (which is about in line with PWCs financials of a margin of 17% distributable to partners). That’s not wildly better than the average private non-financial profit margin of c.13% (from the ONS).

      Anyway, enough on costs. I’m sympathetic with the public sector point you mention. I personally found it a bit morally questionable whether it was right for my old firms to be charging so much money to the NHS, regulators etc. It’s a tricky one, but politicians (of all stripes) have decided the public sector should be outsourcing this stuff. I don’t think that’s the financial industry’s fault, but they’ve certainly got fat on those fees. Having seen how the sausages are made, I feel uncomfortable with the level of public sector outsourcing, but there seems to be very little political will to change things.

      “Carillion is/was a massive company with a turnover that rivalled the GDP of some small countries.” – funny you say that because that’s exactly what I say to people. This is the one-off of all one-offs (but that doesn’t mean we can’t learn some lessons). My bread and butter work was where big service contracts went horribly wrong. Carillion was a behemoth, and one in a real mess to boot. You ask how could things go so wrong? I hope to answer that in the next part!

      1. Cracking reply!

        I’m off to read part 2 of the saga, I’d be interested on your take on how it could all go unchallenged for so long.

        I like your point about the lack of political will to change things, unfortunately that will never change. The system so to speak benefits those like ourselves who have been fortunate enough to move into ‘protected’ professions such as law, auditing & accounting.

        Crime on a street corner is horrendous, as is the increasing amount of anti-social behaviour ignored by the police and MPs, but in comparison, the messes that ruin lives like Carillion going from circa £32.00 per share to zero resulting in mass job losses, incomplete projects such as the mothballed Royal Liverpool Hospital as one example, these economic crimes are committed by people wearing suits clad in their armour of corporate slogans about ‘social responsibility’ and ‘serving the community’ and other such nonsense. It’s literally Orwellian! Say one thing, do another and no matter what you’ll be protected by the state.

        The board members spring up like weeds in other protected companies and then to add insult to injury we have the merry-go-round of the same people moving back and forth from private companies to positions in the FCA, Pensions Regulator and the myriad of other paper tigers.

        If a gas engineer negligently installs a boiler they lose their Gas Safe certification and can’t work again, when these crooks devastate lives they get paid! Crazy.

        1. My favourite quote from one of my favourite books: “A lawyer with a briefcase can steal more than a hundred men with guns.” (you can replace lawyers with any of the ‘usual types’)

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