Deconstructing Carillon’s Construction Fraud

We’re going to stay in the UK for this next fraud. It goes back a little bit. Carillon, PLC was a construction giant in the UK that collapsed suddenly in 2018. In 2017 Carillon issued a profit warning indicating a decrease in the value of its contracts by £845 million. Later that year, the decrease stretched to more than a billion pounds. By the next year, Carillon was done with liabilities of £7 billion, but only £29 million in the bank. More than 3,000 people lost their jobs and hundreds of projects were impacted.

This was classic fraud at the top, but also in the middle and all the way down.

Carillon regularly used accounting estimates to misrepresent revenue. Carillon consistently overestimated the revenue they were generating. In a simplified example, Carillon found cracks in concrete columns on a large project. Remediation was estimated to result in a loss on the project of 12.7%. Instead, management overrode the estimate and recorded an expected profit of 4.9%. At some point, this is unsustainable.

Additionally, Carillon regularly recorded revenue that was “traded not certified”. This was revenue that clients had not signed off on yet. Often this revenue was in dispute and extremely uncertain. Carillon didn’t disclose the nature of this revenue in its financial statements. In 2016 this amounted to £294 million.

Carillon also used reverse factoring to hide debt in its supply chain. Essentially banks would pay the bills, Carillon would pay the banks at a later date. This allowed Carillon to hide longer-term debt as trade payables making the company’s financials look better. Carillon misclassified almost half a billion pounds this way.

Ultimately, Carillon failed spectacularly. KPMG was fined £14 million and severely reprimanded for its role as Carillon’s auditor. This was a fraud all the way down. Even as they were making up numbers Carillon was paying out huge dividends.