NAO has published an investigation into the government’s handling of the collapse of Carillion which identifies that the Cabinet Office began contingency planning for a possible failure shortly after the company posted its first profit warning in July 2017. The scale of the profit warning came as a surprise to the government, according to the audit watchdog, as it contradicted market expectations and information and commentary that had been provided by Carillion.

The Cabinet Office raised Carillion’s risk rating from amber to red but did not increase Carillion’s rating to its highest rating, ‘high risk’ as it accepted Carillion’s argument that it was already in receipt of the sensitive financial information such a rating would require and that they did not wish to risk precipitating Carillion’s financial collapse.

In the months following Carillion’s first profit warning, the company announced £1.9bn of new government work, including two joint venture contracts with HS2 worth £1.3bn. The NAO noted that the procurement methodology did not allow for the risk warning status to be reflected in the tendering process.

In early January, Carillion asked the government for £223m to help it through to April 2018 and additional support with its financial restructuring. Rather than provide this, the Cabinet Office decided it was better that Carillion enter into a trading liquidation, because it had serious concerns about Carillion’s business plans, the legal implications, potential open-ended funding commitments, the precedent it would set, and the concern that Carillion would return with further requests. At the point of liquidation, Carillion had around 420 contracts with the UK public sector.

Amyas Morse, head of the NAO, said: ‘When a company becomes a strategic supplier, dependencies are created beyond the scope of specific contracts. Doing a thorough job of protecting the public interest means that government needs to understand the financial health and sustainability of its major suppliers, and avoid creating relationships with those which are already weakened. Government has further to go in developing in this direction.’

Frank Field, chair of the work and pensions committee, said Carillion had ‘hoodwinked the government as they did many others who were so naïve as to trust their published accounts.’

Field said the company’s management had attributed its problems to ‘some of its more exotic forays overseas’, but said the NAO’s explanations of why ‘common or garden’ UK public sector construction contracts failed betrayed Carillion’s ‘extraordinarily negligent planning’.

His comments were also critical of PwC’s role as special managers in the liquidation, which Field described as ‘a contract to print money awarded without any competition’.

The committee has written to PwC and the Official Receiver requesting further information about potential conflicts of interests, with Field saying he is particularly concerned that PwC’s conflicts could jeopardise action against individual directors.

Rachel Reeves, chair of the BEIS committee, said: ‘Carillion was the gift that kept on giving – for the Big Four, at least, as they raked in millions for their audit and other work.

‘The dice are loaded in the Big Four’s favour. They make a killing in fees advising struggling companies how to turn them round and then they pocket millions tidying up when that advice fails On Carillion, taxpayers are left to foot the multimillion pound bill for corporate failure. PwC, who profited from Carillion as it inched towards collapse, are expected to wring at least another £50m from its ruins as the government appointed special managers to the insolvency, while thousands of smaller creditors will get nothing at all.’

A spokesperson for PwC said it had been appointed to manage ‘a liquidation of exceptional size and complexity as quickly and effectively as possible.

‘We understand concerns over the cost of the liquidation, however, without this work the cost to UK jobs, the economy and the taxpayer would be considerably higher.’

The NAO investigation into the government’s handling of the collapse of Carillion is here.

Report by Pat Sweet