The accounting watchdog is expected to announce an investigation into potential misconduct by two former finance directors at Carillion, the failed government contractor.
The Financial Reporting Council’s conduct committee is understood to have agreed that there are sufficient grounds for a probe into the conduct of Richard Adam and Zafar Khan. An announcement is expected early next week. A spokesman for the FRC declined to comment.
Frank Field and Rachel Reeves, the MPs leading a joint select committee inquiry into Carillion’s failure, welcomed the regulator’s decision to investigate individual directors.
In evidence to the business select committee in January, the FRC chief executive, Stephen Haddrill, told MPs the watchdog was examining whether an investigation was required into any misconduct by “members in business”, rather then a mere breach of regulations.
The FRC can prevent a finance director who is a member of a professional association from practising. It can also table significant fines against those found to have “fallen significantly short of the standards reasonably to be expected” or brought discredit to the accountancy profession.
The Insolvency Service is already investigating the conduct of directors employed at the point at which the outsourcing giant collapsed, but “also of any individuals who were previously directors”, following a request from the business secretary, Greg Clark.
The FRC has so far restricted itself to examining the ethical and technical standards of the accountancy firm KPMG over its audits for Carillion between 2014 and 2017.
The work and pensions committee chair, Frank Field, welcomed the FRC’s decision to widen its probe to include directors but said regulators should have acted sooner.
“If the select committees hadn’t undertaken this review, all the horrors of Carillion would have been swept under a carpet, lumpy as the carpet would have been afterwards,” he said.
“Great news the FRC is acting but where were they when all this was blowing up? What Britain desperately needs is a regulatory system that is on the front foot.”
Reeve said: “To uphold our standards in corporate governance and to help ensure that we avoid a future business disaster akin to Carillion, it’s important that Carillion directors face the full force of the law for their role in the collapse of the company.”
Carillion went into liquidation in January, with pension liabilities and debts each exceeding £1bn. It had just £29m in cash at the point of its collapse. Carillion relied on large contracts, some of which proved much less lucrative than it expected. Last year it slashed the value of them by £845m, of which £375m related to public-private partnerships (PPPs) such as Royal Liverpool University hospital.
The company employed 20,000 people in the UK and held 450 public sector contracts. Earlier this month the Canadian firm, BGIS, pulled out of a deal to buy a significant number of those from the firm, putting at risk 2,500 jobs that had seemed saved.
Adam, who had managed Carillion’s finances from April 2007 to December 2016, offloaded £534,000 of shares on 1 March last year, three months after retiring from the company. He sold a further £242,000 of stock handed to him in May as part of a bonus scheme. Shortly afterwards, the auditor KPMG forced the Carillion to slash the value of its contracts by £845m and issue a profit warning.
In a letter to MPs on a joint select committee conducting an inquiry into Carillion’s demise, Adam said: “I sold the shares on these dates because they were the days that I was invited to do so by the company.”
Giving evidence, he conceded that he knew the company was in a “challenging” position when he left, but added: “Could I just say, because I have been out of the business for over a year, how saddened I am by all of the events.”
Khan was finance director between August 2016 and September 2017, when he was axed with a £425,000 payoff.
He claimed to MPs that he was dismissed after he “spooked” the rest of the board with a presentation warning that the company’s finances had worsened. He denied he had been “asleep at the wheel”.
Giving evidence to MPs, Emma Mercer, who succeeded Khan, said those who had been in post before her had taken an “aggressive tone” in their valuation of contracts that later underperformed.
In a sign of the continuing ripples caused by Carillion’s failure, Phil Bentley, the chief executive of Carillion’s former chief competitor, Mitie, warned in a statement on Friday that the year ahead would remain “challenging” for his firm. He said: “The liquidation of Carillion has raised some fundamental questions about the outsourcing industry.”