Deloitte's24 Jan 2018 10:47
Then there is the role of Deloitte. Carillion�s 2009 annual report noted that after a review that year, the decision was taken to outsource the internal audit function to Deloitte LLP. After a transition period, Deloitte LLP assumed full responsibility for internal audit in January 2010.
By taking the internal audit role, Deloitte effectively became part of Carillion�s management team. The fee paid to Deloitte is not known but is likely to be substantial.
In its role as internal auditor, Deloitte performed several other functions � including assessing the adequacy and effectiveness of internal controls over key risks faced by the business.
The company�s 2016 annual report said that: �The Group�s assessment of principal risks is taken into account in the development of internal audit plans�The Group�s risk management procedures are reviewed by its Internal Audit function on a periodic basis.�
Internal audit provided health checks on contract management, financial strength, underlying operating margins, cash conversions, net debt, performance reviews throughout the business, and assessing the financial strength of the company. It also liaised with external auditors. Deloitte reported its findings to management, the Executive Directors and the Audit Committee.
The risk reports prepared by Deloitte are not publicly available. But Carillion had been on borrowed time. It operated on wafer-thin profit margins of 2%-5%.
By its own admission, in the first half of 2016 it had an underlying profit margin on only 4.9% which in the first half of 2017 declined to 3.5%.
By June 2017, the first half of 2016 profit of �84m turned into a loss of �1.15bn, after a write down of worthless contracts. The company did not have the capacity to borrow more, and banks eventually pulled the financial plug.
So the inevitable questions arise about the quality of advice received from Deloitte: how well did the firm analyse � and push the company to respond to � the major risks?
Deloitte also advised Carillion on executive pay. A note in the company�s 2009 audited accounts stated that since 2005, the Remuneration Committee has used Deloitte to provide salary survey and benchmarking information and external and internal contextual information and analysis as required.
The firm�s advice fuelled fat-cattery: in 2016, Carillion�s chief executive pocketed �1.5m, including a bonus of �122,612 and a contribution of �231,000 to his pension pot. These pension bonuses come in spite of Carillion�s huge pension scheme deficits at the time. Deloitte also provided other consultancy services, including advice on pension investment.
All three firms have questions to answer in the wake of Carillion�s collapse. More widely, we have to look at the wisdom of outsourcing vital functions like internal audits.
The Big Four raked in huge sums w
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