Carillion Collapse Exposes Flaws in Trade Finance Disclosure

A report by Moody's says lax accounting requirements for reverse factoring arrangements helped mask the U.K. firm's deteriorating financial condition.
Vincent RyanMarch 14, 2018
Carillion Collapse Exposes Flaws in Trade Finance Disclosure

The collapse of a construction firm in the United Kingdom has exposed shortcomings in the accounting for reverse factoring arrangements, says Moody’s Investors Service. The trade payable financing tactic, also called supply chain finance, allowed the firm, Carillion, to hide nearly $500 million pound sterling in liabilities, Moody’s claims.

The spectacular and sudden collapse of Carillion, which was a major supplier to the British government, has sparked much discussion and hand-wringing in the United Kingdom over how the company managed to conceal its poor financial condition. (The company entered compulsory liquidation in January.)

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Reverse factoring is an arrangement in which a bank or other provider pays a company’s suppliers faster than the set credit terms in exchange for a discount. The bank carries the debt until the company repays it the full amount it owed the supplier, enabling the company to stretch its credit terms to extreme lengths.

However, in the absence of a specific accounting requirement under International Financial Reporting Standards, says Moody’s, few companies make explicit disclosure of these financing agreements with suppliers and banks.

Carillion headquarters in Wolverhampton, England

Carillion headquarters in Wolverhampton, England

“The possible existence of these arrangements can often only be uncovered by scrutiny of the amounts reported as trade payables and other creditors,” according to the Moody’s report.

In Carillion’s case, “the scale of the liability to banks was not evident from the balance sheet, and a key source of the cash generated by the business was not clear from the cash-flow statement,” said Trevor Pijper, a senior credit officer at Moody’s.

Moody’s says Carillion’s 2016 balance sheet indicated that the group’s bank loans and overdrafts amounted to 148 million pound sterling. But as much as 498 million pound sterling was owed to banks under the reverse factoring arrangement, which started in 2013.

Carillion’s cash-flow woes were a key issue in its collapse. To help with cashflow, Carillion had quadrupled payment terms on its subcontractors to 4 months from 30 days, according to a review by the company’s board of directors that was published by members of the U.K. parliament.

The company was also having trouble collecting payment for oustsourcing work it had done in Canada and the Middle East.

In the meantime, Carillion was carrying a debt load of 1.5 billion pound sterling, which included a 590 million pound sterling pension deficit.

This is not the first time Moody’s has questioned the the accounting of supply chain finance. In December 2015, the credit rating agency criticized the lack of disclosure of a large-scale reverse factoring program being used by Spanish energy group Abengoa S.A.

Photo © Roger KiddCC-BY-SA 2.0

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