The former chief executive of Carillion plc, Richard Howson, has been fined £237,000 for his role in misleading statements being issued by Carillion and being knowingly concerned in breaches of Market Abuse Regulations and the Listing Rules by the company. This decision comes more than eight years after Carillion entered compulsory liquidation and further to Mr Howson's decision to withdraw his challenge to the FCA's findings.
Background
On 15 January 2018, international construction and project finance company Carillion entered compulsory liquidation. At the time of its collapse, the construction company was one of the UK's biggest construction and facilities management companies. It employed around 43,000 people globally, including 19,000 in the UK.
Due to the scale of the collapse, the Official Receiver's investigation into the causes of the company's failure was fast-tracked – a parliamentary inquiry followed, as well as investigations by the FCA, the Serious Fraud Office ("SFO"), Insolvency Service, the Pension Regulator ("TPR") and the Financial Reporting Council ("FRC").
The reasons for Carillion's compulsory liquidation can be traced to an announcement by the firm in July 2017. An expected provision of £845 million was announced, which arose from a review following a deterioration in cash flows on construction projects. This resulted in a share price fall of 39% on the day of the announcement and a cumulative decline of 70% within three days. According to the FCA's Final Notice, Carillion had given no indication in earlier announcements that such a provision was likely to be required and the announcement shocked investors.
Mr Howson had acted as Group Chief Executive Officer since January 2012 until July 2017.
Decision
The FCA found that Mr Howson had been aware of Carillion's financial issues in the UK construction industry, and failed to communicate such issues in both company announcements or to the company's board and audit committee between 1 July 2016 and 10 July 2017.
The following features of Mr Howson's role and involvement were highlighted in the Final Notice:
- "Significant pressure" was placed on Carillion to meet challenging financial targets maintained by Mr Howson, despite clear financial warning signs;
- "Overly aggressive" contract accounting judgments were made to maintain attractive reported revenues and profitability;
- Such "aggressive" accounting judgments were not properly documented at Performance Review Meetings chaired by Mr Howson and there was therefore no clear record of assessments being made, approved or reviewed. Carillion was therefore prevented from complying with its obligations under the Listing Rules;
- Reports to the Board and Audit Committee (for which Mr Howson was responsible) "painted a much more optimistic picture" of the Company's financial performance than internal reports;
- Announcements preceding the July 2017 provision announcement made unjustified positive statements – such as that Carillion's performance was "meeting expectations" and that "strong growth" was expected.
The FCA concluded that Mr Howson had acted recklessly in the above course of conduct, having been aware that there was a risk that announcements were false or misleading. The FCA furthermore found that he had not responded appropriately to these risks.
Mr Howson was fined £237,000 for (1) acting recklessly, and (2) being knowingly concerned in breaches by Carillion of the Market Abuse Regulations and the Listing Rules.
The fine was notably reduced from £397,800 to £237,700 to reflect Mr Howson's cooperation, as well as to reflect a reduction in the earnings in his final year as chief executive as initially estimated by the FCA.
Comment
The investigation of Mr Howson's role leading up to Carillion's liquidation highlighted a mismatch between papered findings in internal processes, and upward and external communications. Evidence of financial issues and corresponding data existed but there was a failure to communicate these to the Board or the Audit Committee.
This decision also clarified that Mr Howson's defence would not stand. Mr Howson advanced the argument that he was permitted to rely on the Group Finance Director who bore the responsibility for accurate reporting of financial results to the market. The FCA's response was that "Mr Howson’s responsibilities included working closely with the Group FD" to ensure proper processes and risk management, and that he "could therefore not reasonably fail to inform the Board and the Audit Committee of the warning signs" of Carillion's financial position. This is an important reminder that responsibilities can be held by multiple individuals.
The 40% reduction of Mr Howson's fine underlines the importance of cooperation at an early stage with the FCA – although half of the reduction relates to a change in Mr Howson's estimated income during the relevant time period, the other half is directly related to his cooperation in the investigation. By challenging the penalty, and not settling at stage 1, Mr Howson did not qualify for a 30% settlement reduction. However, in any event, Mr Howson managed to secure a greater discount.
It is of note that between the date of the initial decision notice against Mr Howson and this final notice, the Upper Tribunal in the case of Donaldson and Arden considered that attendance at FCA interviews and answering questions amounted to cooperation which merited a discount. It seems likely that this decision was taken into account by the FCA Settlement Decision Makers in agreeing to a 20% discount in this case.
In terms of Carillion's wider legacy, eight years on from its collapse, the Department for Business and Trade ("DBT") have now withdrawn the Audit Reform Bill – a bill which promised to reform conditions in the audit market which facilitated the collapses of Carillion and BHS. The DBT is instead now committed to "pressing ahead with modernising corporate reporting to reduce unnecessary burdens", so as to avoid significant new costs for large businesses.