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DECISION NOTICE

1.
ACTION

1.1.
For the reasons given in this Decision Notice, the Authority has decided to impose

on Zafar Khan a financial penalty of £154,400 pursuant to:

(1)
Section 123 (power to impose penalties in cases of market abuse); and

(2)
Section 91 (penalties for breach of Part 6 rules)

of the Financial Services and Markets Act 2000.

1.2.
The Authority has decided to impose the aforementioned financial penalty on Mr

Khan for being knowingly concerned in breaches by Carillion plc of:

(1)
Article 15 of MAR (prohibition of market manipulation);

(2)
Listing Rule 1.3.3R (misleading information must not be published);

(3)
Listing Principle 1 (procedures, systems and controls); and

(4)
Premium Listing Principle 2 (acting with integrity).

This decision notice has been referred to the Upper Tribunal to determine what
(if any) the appropriate action is for the Authority to take, and remit the matter
to the Authority with such directions as the Tribunal considers appropriate.

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2.
SUMMARY OF REASONS








Carillion




2.1.
Carillion was, until it went into liquidation in January 2018, a leading international

construction, project finance and support services business operating in the UK,

Canada and Middle East.

2.2.
On 10 July 2017, Carillion announced (amongst other things) an expected

provision of £845 million as at 30 July 2017, of which £375 million was in relation

to projects in Carillion Construction Services (CCS). The provision arose from a

review following a deterioration in cash flows across several construction projects,

including within the UK.

2.3.
The nature of the required provision surprised market analysts and Carillion’s

share price fell by 39% on the day of the announcement and by 70% within three

days. Carillion subsequently went into liquidation on 15 January 2018.

2.4.
The market’s adverse reaction resulted from the unexpected nature and size of

the provision, which effectively wiped out Carillion’s profits over the previous six

years. Carillion’s previous announcements, including its 2016 financial results

published on 1 March 2017 and its AGM statement on 3 May 2017, had given no

indication to the market that such a provision was likely to be required.

2.5.
Such previous announcements were misleading and were made recklessly. They

did not accurately or fully disclose the true financial performance of Carillion. They

made positive statements about Carillion’s financial performance generally and in

relation to CCS’s construction business segment in particular. They failed to

disclose significant deteriorations in the expected performance of projects across

the CCS portfolio and did not take account of a series of warning signs indicating

anticipated losses and/or reduced profitability across a number of major

construction projects. It was these matters that, when eventually acknowledged

by Carillion, led to a significant proportion of the provision announced in July 2017.

2.6.
Mr Khan was Carillion’s Group Finance Director from January 2017 up until

September 2017. This Notice relates to Mr Khan’s conduct as Group FD between

1 January 2017 and 10 July 2017 (the Relevant Period).

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2.7.
During the Relevant Period, Mr Khan was one of two executive directors on

Carillion’s Board. As Group FD he was the director with primary responsibility for

ensuring financial information disseminated to the market was accurate and not

misleading. He was also responsible for ensuring that Carillion had adequate

procedures, systems and controls in place relating to financial reporting.

2.8.
Prior to the Relevant Period, Mr Khan worked at Carillion as the Group Financial

Controller. He originally assumed this role on a permanent basis in September

2015 and occupied this position throughout 2016. Mr Khan, in his capacity as

Group FC, received information which disclosed significant deteriorations in the

expected financial performance of various CCS projects in the latter part of 2016.

Whilst the Authority does not seek to attach liability to Mr Khan for events that

occurred prior to the Relevant Period, as he was not a director, it considers that

Mr Khan’s knowledge of, and involvement in, matters that occurred in the latter

part of 2016 is relevant to his culpability during the Relevant Period.

Overly aggressive contract accounting judgements and internal reporting to Mr

2.9.
There was significant pressure on CCS, during the latter part of 2016 and

throughout the Relevant Period, to meet very challenging financial targets in the

face of clear warning signs that CCS’s business was deteriorating significantly. As

Group FD, Mr Khan (along with other senior management) maintained these

targets during the Relevant Period. This led to an increasingly large gap between

the assessments within CCS of its financial performance and its performance as

budgeted and ultimately reported to the market.

2.10.
This gap was bridged, both prior to and during the Relevant Period, by the use of

overly aggressive contract accounting judgements in order to maintain CCS’s

reported revenues and profitability, especially in connection with certain major

construction projects. These judgements did not reflect the true financial position

of the projects or the financial risks associated with them. They did not comply

with IAS 11, one of the applicable accounting standards governing the recognition

of revenue associated with construction contracts.

2.11.
The financial risks and exposures associated with these judgements were

highlighted to Mr Khan and others by CCS management, both prior to and during

the Relevant Period. In particular:

(1)
CCS internally reported “hard risks” associated with its construction

projects. These were amounts included within budgeted forecasts, but

which were considered by CCS management as unlikely to be recovered. In

August and October 2016, hard risks within CCS were reported to Mr Khan

and others as amounting to around £172 million. By April 2017 Mr Khan

knew this had increased to just over £310 million.

(2)
CCS, along with other Business Divisions within Carillion, reported potential

exposures to amounts due on major projects. This was contained in a report

known as the Major Contracts Summary (MCS). By October 2016, the total

amount due to CCS that was considered to be contentious was just under

£244 million, with a “likely” exposure of around £173 million (i.e. 71% of

the contentious amounts due) and 11 out of 16 named major projects

marked with a red flag status. This was reported to Mr Khan and others.

By May 2017, according to an MCS dated 4 May 2017 received by Mr Khan,

the likely exposure figure had increased to over £430 million (71% of the

contentious amounts due).

(3)
Large and increasing divergences in financial performance were highlighted

to Mr Khan and others during the Relevant Period in relation to four major

projects: Royal Liverpool University Hospital (RLUH), Phase 1 Battersea

Power Station redevelopment (Battersea), Midland Metropolitan Hospital

(MMH) and Aberdeen Western Peripheral Route (AWPR). This made clear

that there was an increasingly large disparity for those projects between the

assessments of financial performance by project and/or management teams

within CCS and the financial performance as reflected in Carillion’s budgeted

forecasts. The following gaps were highlighted to Mr Khan and others both

prior to and during the Relevant Period:

a.
RLUH: A £21 million loss (assessed by the relevant Project Team)

against a budgeted forecast profit of £13.6 million by December 2016,

a difference of almost £35 million. This difference increased to £72

million by April 2017 as RLUH’s financial performance deteriorated.

b.
Battersea: A £25 million loss (assessed by the relevant Project Team)

against a budgeted forecast profit of around £10 million by December

2016, a difference of £35 million. This gap rose to over £43 million by

April 2017.

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c.
MMH: A £15.7 million loss (assessed by the relevant Project Team)

against a budgeted forecast profit of £17.7 million by April 2017, a

difference of over £33 million.

d.
AWPR: A £78 million loss (assessed by the relevant Business Unit

within CCS) against a budgeted forecast loss of £10 million by

December 2016, a difference of £68 million. This increased to a gap of

over £85 million by April 2017.

2.12.
When Carillion made its provision in July 2017, a total of £240 million was

provided against the above four projects, consistent with the amounts noted

above. This represented almost two-thirds of CCS’s total provision of £375

million.

Reporting to the Board and the Audit Committee

2.13.
Mr Khan, as Group FD, was responsible for internal financial reporting to the Audit

Committee and the Board, and for determining the appropriate level of provisions

for construction contracts during the Relevant Period.

2.14.
The financial risks and exposures reported in 2017, described at paragraph 2.11

above, were not reported by Mr Khan (or otherwise to his knowledge) to the Board

or the Audit Committee during the Relevant Period. The key information received

by the Board and the Audit Committee in relation to the financial performance of

CCS and its major projects during the Relevant Period was in the form of a

monthly Overtrade Report and a quarterly Major Project Status Report (MPSR).

They were also informed about the level of provisions applied to Carillion’s major

contracts (which, prior to the £845 million provision announced on 10 July 2017,

totalled £50.1 million for the whole of Carillion’s business). At half and full year

the Group FD, Richard Adam in 2016 and Mr Khan during the Relevant Period,

provided a report to the Audit Committee including a summary of financial risks

and key judgements associated with major projects.

2.15.
As Mr Khan was aware, these reports to the Board and the Audit Committee

painted a much more optimistic picture of CCS’s financial performance than that

being internally reported by CCS. As stated in paragraph 2.11(2) above, the MCS

in October 2016 (which the Board and the Audit Committee did not see) was

identifying a likely exposure of £173 million. In contrast, the Overtrade Report

did not show what those within CCS thought were likely exposures; instead, it

showed revenue “traded not certified” (i.e. amounts that had not yet been agreed

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with the client which the Overtrade Report reported as appropriate to recognise

as revenue). Throughout the latter part of 2016 and during the Relevant Period

up to February 2017, it reported this revenue at between £42 million and £44

million.

2.16.
The MPSR was aligned, to Mr Khan’s knowledge during the latter part of 2016 and

the Relevant Period, to the budgeted and reforecast figures and did not disclose

increasing variances between these figures and the Project Team’s or Business

Unit’s assessments of RLUH, Battersea, MMH and AWPR. It did not show any

material deterioration in CCS’s major projects during the Relevant Period. The

Group FD report for the 2016 full year similarly did not identify any material

deterioration associated with major projects.

2.17.
Before the announcement in July 2017, the amount of provisions in Carillion’s

monthly management accounts for CCS’s projects remained broadly unchanged

at up to £17 million for all risks.

The Announcements

2.18.
The March Results Announcement made positive statements that Carillion’s

performance was “in line with expectations”, with revenue growth for the Group

of 11% and underlying profit before tax (PBT) of £178 million. The document

published alongside (and linked from) the March Results Announcement stated

that “Revenue grew strongly by 21 per cent” in Construction Services (excluding

the Middle East)1 and confirmed that operating margin for this segment “remains

within our target range of 2.5 per cent to 3 per cent”. It described the ambition

for this segment in 2017 as being “to maintain revenue and profit at broadly their

current levels”. The March Results Announcement went on to refer to Carillion

having a “good platform from which to develop the business in 2017”.

2.19.
The March Results Announcement was misleading because the above statements

concerning the financial performance of Carillion and Construction Services

(excluding the Middle East) for 2016 and stated expectations for 2017 did not

reflect the true performance of CCS’s construction contracts and the

announcement omitted any reference to the significant risks associated with these

stated expectations as described at paragraph 2.11 above. The revenue and

profit/margin figures for the Group and Construction Services (excluding the

1 The business segment of Construction Services (excluding the Middle East) included CCS’s construction
business

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Middle East) in the March Results Announcement were misstated because they

did not accurately reflect the financial performance of RLUH, Battersea, MMH and

AWPR. In particular, Carillion failed to recognise the costs and revenue associated

with these projects in accordance with IAS 11. The revenue and profit / margin

figures were materially overstated as a result. The positive statements for 2017

for Group and Construction Services (excluding the Middle East) were similarly

not justified because they did not take account of matters arising before this date

described at paragraph 2.11 above.

2.20.
The tenor of the May Announcement was that nothing had materially changed

since the March Results Announcement. This was reflected in its heading

(“Trading conditions unchanged”) and opening sentence (“Trading conditions

across the Group’s markets have remained largely unchanged since we announced

our 2016 full-year results”). This was not an accurate depiction of the Group’s

trading as at 3 May 2017, which was materially affected by the adverse and

deteriorating financial performance of CCS’s construction projects as at the date

of this announcement as described at paragraph 2.11 above.

2.21.
Mr Khan as Group FD had a central role in preparing and finalising the

Announcements and approving them as a Board member. He did so in the

knowledge of information reported to him on a number of occasions and

summarised at paragraph 2.11 above that was materially inconsistent with the

positive statements made in the Announcements. Mr Khan must have been

aware, particularly given his previous role as Group FC and having regard to the

nature and cumulative effect of the information and the number of occasions on

which it was reported to him, that this information would be highly relevant to the

deliberations of the Audit Committee and the Board when they reviewed and

approved the Announcements. However, Mr Khan failed to ensure that this

information was brought to the attention of the Audit Committee and the Board.

2.22.
In light of the above, the Authority considers that Carillion disseminated

information in the Announcements that gave false or misleading signals as to the

value of its shares in circumstances where it ought to have known that the

information was false or misleading, in breach of Article 15 of MAR, and that Mr

Khan was knowingly concerned in Carillion’s breach of Article 15 of MAR.

2.23.
During the Relevant Period, Mr Khan was aware that Carillion intended to

announce a PBT figure of £178 million in its 2016 financial results. He was also

aware that this PBT figure included financial reporting for RLUH, Battersea and

AWPR that was aligned with the budgeted forecast figures at paragraph 2.11

above. Mr Khan did not take any steps during the Relevant Period to address the

material inconsistencies between the proposed PBT figure and financial reporting

for RLUH, Battersea and AWPR and other information of which he was aware (see

paragraphs 2.15 and 2.16 above). He also failed to bring these matters to the

attention of the Audit Committee and the Board.


2.24.
In light of the above, and the matters summarised at paragraphs 2.25 to 2.30

below in relation to Listing Principle 1, the Authority considers that Carillion failed

to take reasonable care during the Relevant Period to ensure that the

Announcements were not misleading, false or deceptive and did not omit anything

likely to affect the import of the information, in breach of LR 1.3.3R, and that Mr

Khan was knowingly concerned in Carillion’s breach of LR 1.3.3R.

Procedures, systems & controls

2.25.
The deterioration in CCS’s business during the Relevant Period, coupled with the

pressure to meet very challenging financial targets, significantly increased the risk

that overly aggressive contract accounting judgements would be applied in order

to maintain its financial performance. To counter this risk, Carillion’s procedures,

systems and controls in relation to CCS needed to be sufficiently robust to ensure

that these judgements were made and reported appropriately. They were not,

significantly increasing the risk that market announcements in relation to

Carillion’s financial performance would not be accurate.

2.26.
The overly aggressive contract accounting judgements being applied to CCS’s

major projects were not properly documented at Performance Review Meetings

held by CCS (which Mr Khan attended) and in the preparation of Position Papers

for major projects (that Mr Khan received). This meant there was no clear record

of the assessments being made, approved or reviewed. This contributed to a lack

of rigour around these judgements and their approval and review.

2.27.
The management information relating to hard risks, MCSs and certain major

projects produced and reported by CCS to (amongst others) Mr Khan highlighted

large and increasing risks associated with the financial performance of CCS’s

construction projects during the Relevant Period. This information was

inconsistent with other reports (such as Overtrade Reports and MPSRs) that

contained much more optimistic assessments of the financial performance of

those projects, as reported to the Board and the Audit Committee.

2.28.
The Board and the Audit Committee were not made aware of the significant and

increasing financial risks during the Relevant Period as described above. This

meant they were hampered in providing proper oversight of CCS’s financial

performance and the overly aggressive contract accounting judgements being

applied to its major projects.

2.29.
In light of the above, the Authority considers that, during the Relevant Period,

Carillion failed to take reasonable steps to establish and maintain adequate

procedures, systems and controls to enable it to comply with its obligations under

the Listing Rules, in breach of Listing Principle 1.

2.30.
As the Group FD with responsibilities for ensuring that Carillion had adequate

procedures, systems and controls relating to financial reporting, the Authority

considers that during the Relevant Period, Mr Khan was knowingly concerned in

Carillion’s breach of Listing Principle 1.

2.31.
The Authority considers that Mr Khan acted recklessly, during the Relevant Period,

in relation to the facts and matters set out at paragraphs 2.9 to 2.29 above. As

a result, Carillion failed to act with integrity towards its holders and potential

holders of its premium listed shares, in breach of Premium Listing Principle 2, and

Mr Khan was knowingly concerned in Carillion’s breach of Premium Listing

Principle 2.

2.32.
The Authority has therefore decided to impose a financial penalty on Mr Khan in

the amount of £154,400 pursuant to sections 91 and 123 of the Act.

3.
DEFINITIONS

3.1.
The definitions below are used in this Notice:

“the Act” means the Financial Services and Markets Act 2000;

“AGM” means Annual General Meeting;

“Announcements” means the March Results Announcement and the May

Announcement;

“the Authority” means the body corporate known as the Financial Conduct

Authority;

“AWPR” means Aberdeen Western Peripheral Route which was a project structured

as a joint venture with two other partners;

“Battersea” means the Phase 1 Battersea Power Station redevelopment;

“Building” means the Buildings Business Unit within CCS;

“Business Division” means one of the following divisions that Carillion’s business

was divided into during the Relevant Period: CCS, Carillion Services, MENA,

Canada, Al Futtaim Carillion and Carillion Private Finance;

“Business Unit” means a sub-division of CCS, including (amongst others) Buildings

and Infrastructure;

“Carillion” means Carillion plc;

“CCS” means Carillion Construction Services, a Business Division of Carillion;

“CEO” means Chief Executive Officer;

“December Announcement” means Carillion’s trading update published on 7

December 2016;

“DEPP” means the Decision Procedure and Penalties manual, part of the

Handbook;

“Group” means the Carillion group of companies, of which Carillion plc was the

ultimate parent company;

“Group FC” means the Group Financial Controller for Carillion;

“Group FD” means the Group Finance Director for Carillion;

“the Handbook” means the Authority’s Handbook of rules and guidance;

“IAS 11” means International Accounting Standard 11;

“Infrastructure” means the Infrastructure & Railways Business Unit within CCS;

“the Listing Rules” means those rules contained in the part of the Handbook

entitled ‘Listing Rules’;

“MAR” means Regulation (EU) No 596/2014 of the European Parliament and of

the Council of 16 April 2014 on market abuse;

“March Results Announcement” means Carillion’s 2016 financial results published

on 1 March 2017;

“May Announcement” means Carillion’s AGM statement published on 3 May 2017;

“MCS” means Major Contracts Summary;

“MENA” means Middle East and North Africa, a Business Division of Carillion;

“MMH” means Midland Metropolitan Hospital;

“MPSR” means Major Project Status Report;

“MCRM” means Major Contracts Review Meeting;

“PBT” means underlying Profit Before Tax;

“Priority Contracts” means these four major projects: AWPR, Battersea, MMH and

RLUH;

“PRM” means Performance Review Meeting;

“Project Team” means the project and commercial managers assigned to

individual major projects;

“RDC” means the Regulatory Decisions Committee of the Authority (see further

under Procedural Matters below);

“Relevant Period” means 1 January 2017 to 10 July 2017;

“RIS” means Regulatory Information Service;

“RLUH” means Royal Liverpool University Hospital;

“the Tribunal” means the Upper Tribunal (Tax and Chancery Chamber); and

“the Warning Notice” means the warning notice given to Mr Khan dated 18

September 2020.

4.
FACTS AND MATTERS

SECTION A: BACKGROUND


4.1.
During the Relevant Period, Carillion was a leading construction, project finance

and support services business operating in the UK, Canada and Middle East. It

was created following a demerger of Tarmac Group in 1999 and subsequent

acquisitions of (amongst others) Mowlem and Alfred McAlpine. Carillion was

admitted to the Official List of the London Stock Exchange.

4.2.
Carillion was a non-trading investment holding company operating through a large

number of subsidiaries and joint ventures. Its internal and external financial

reporting to the market was broadly aligned with its business structure. Carillion’s

business was divided into the following divisions during the Relevant Period: CCS,

Carillion Services, Middle East and North Africa, Canada, Al Futtaim Carillion and

4.3.
Carillion’s construction business was operated by CCS in the UK and by Canada

and MENA respectively for its overseas construction business. Carillion externally

reported its financial results for its UK construction business as part of a business

segment called “Construction Services (excluding the Middle East)”, including

construction activities in CCS and Canada. This segment represented almost 30%

(£1,520.2 million) of Carillion’s revenue for 2016, of which CCS contributed

£1,452.8 million.









4.4.
In the UK, CCS as a Business Division of Carillion was led by Business Divisional

management. CCS was sub-divided into Business Units, including (amongst

others) Building and Infrastructure. Major construction projects reported directly

into these Business Units. Smaller projects reported into Business Units via

regional teams. Each of the Business Units was led by Business Unit management.

Major projects also had their own project and commercial managers.

4.5.
On 10 July 2017, Carillion announced that it was making a provision of £845

million in relation to 58 contracts within its construction business. Of this

provision, £375 million related to CCS and £470 million to overseas markets (the

majority of which related to existing markets in the Middle East and Canada). The

CCS provision was made when Carillion acknowledged that accounting

judgements it had previously made in relation to its construction projects needed

to be revised significantly downwards. The provision included £240 million in

relation to four major UK construction projects: RLUH, Battersea, AWPR and MMH.

SECTION B: MR KHAN’S ROLES AND RESPONSIBILITIES

4.6.
Mr Khan is a qualified chartered accountant. He joined Carillion, as Finance

Director of the MENA Business Division, in March 2011. He was appointed Group

Financial Controller on a permanent basis in September 2015. His role as Group

FC involved, amongst other things, collating information provided by the Business

Units, including information pertaining to the financial performance of various

projects within CCS and reporting it to the Chief Executive Officer, Richard

Howson, and the then Group Financial Director, Richard Adam.


4.7.
Mr Khan became the Group FD of Carillion in January 2017, having been appointed

in August 2016. His responsibilities included the following:

(1)
Ensuring that Carillion’s financial results were reported to the market

accurately and in line with applicable accounting standards. This included

financial reporting associated with Carillion’s construction projects.

(2)
Ensuring accurate internal financial reporting to the Board and the Audit

Committee to enable them to discharge their functions. This included

attending Board and Audit Committee meetings and reporting at these

meetings regarding Carillion’s financial performance. Pursuant to this, Mr

Khan provided a regular Group FD’s report to the Board and to the Audit

Committee, which typically provided information concerning Carillion’s

financial performance.

(3) Ensuring that there were adequate systems, controls and procedures around

financial reporting to ensure appropriate accounting judgements were being

made, including in relation to the financial performance of Carillion’s

construction projects.

SECTION C: IAS 11 AND CONTRACT ACCOUNTING JUDGEMENTS

4.8.
Carillion’s construction business involved operating a large number of construction

projects for different clients in the UK, the Middle East and Canada. These projects

varied widely in terms of their size and complexity. Their financial reporting was

governed by international accounting standards applicable during 2016 and the

4.9.
IAS 11 applies a “percentage of completion” methodology to construction

contracts. It provides that, where the final outcome of the contract can be

estimated reliably, revenue and costs are recognised in a financial period by

reference to progress in the contract’s stage of completion. The stage of

completion can be assessed in a variety of ways, including (as was adopted in this

case) by reference to the costs incurred to date as a percentage of the total costs

expected to be incurred on a contract. In simple terms, this means that if 50%

of the expected total costs have been incurred within a financial reporting period,

50% of the costs and revenue associated with the contract should be recognised

in the financial statements for that period. For a profitable contract, the difference

between revenue and costs on the contract represents the margin (e.g. profit)

that can be recognised. For a loss-making contract (i.e. where total costs to the

end of the contract are expected to exceed total revenue), IAS 11 requires that

the total expected loss must be recognised in full immediately.

4.10.
When the outcome of the contract cannot be estimated reliably, revenue can only

be recognised up to the extent of costs incurred that it is probable will be

recovered (i.e. if the outcome of the contract cannot be estimated reliably, no

profit can be recognised), but costs are still recognised in the period they are

incurred.

4.11.
The percentage of completion method therefore typically requires assessment of

the expected revenue and costs up to the end of the contract (commonly referred

to as “end of life”) and the percentage of costs incurred to date. Revenue can

include the initial amount of revenue agreed in the contract, as well as amounts

attributable to “variations” and “claims”. A contract’s profit or loss recognised in

Carillion’s financial reporting up to any particular point in time was called “current

traded margin” or “margin traded to date” by Carillion. The overall profit or loss

that it expected to earn to the end of the contract was known as “end of life

margin”.

4.12.
Variations and claims are a common feature of construction contracts and can

comprise a significant proportion of the revenue recognised in relation to a

contract pursuant to IAS 11. Variations may occur when the scope, timing or

specific requirements of a project are changed by a client. Claims can arise

against a client or a sub-contractor in circumstances where there have been

delays or increased costs in a project due to negligence or some other failure on

the part of the client or sub-contractor. Claims can also be brought by those

parties against the construction company (e.g. Carillion).

4.13.
The application of IAS 11 means that the reporting of a construction contract’s

financial performance is heavily influenced by judgements as to the estimated end

of life revenue and costs of a contract and the likely future recoverability of value

associated with claims and variations. This made the proper application of IAS

11 of fundamental importance to Carillion, ensuring that information it published

in relation to its construction business was not false or misleading and/or did not

contain material omissions (as required by LR 1.3.3R and Article 15 of MAR). It

was also fundamental to Carillion’s obligation pursuant to Listing Principle 1 to

take reasonable steps to establish and maintain adequate procedures, systems

and controls to enable it to comply with its obligations under the Listing Rules.

4.14.
Mr Khan as Group FD was the director primarily responsible during the Relevant

Period for ensuring that Carillion’s financial reporting to the market was accurate,

not misleading and complied with applicable accounting standards. This included

ensuring that any material contract accounting judgements around revenue and

costs on CCS’s construction projects were compliant with Carillion Group policy

and with IAS 11.

SECTION D: CARILLION’S PROCEDURES, SYSTEMS AND CONTROLS

4.15.
Carillion’s relevant procedures, systems and controls around contract accounting

judgements within CCS were established prior to the Relevant Period and were

designed around a forecasting process that was supposed to operate on a “bottom

up” basis. In other words, judgements affecting the financial performance of

construction projects were supposed to be led by those most directly involved in

managing the projects, utilising the expertise and experience within the Project

Teams, Business Units and Business Divisions. Their views could, however, be

subject to challenge by more senior management, especially during Carillion’s

budgeting and reforecasting process, and the requirement to report in compliance

with IAS 11 made challenge particularly important in the circumstances.

4.16.
In the latter part of 2016 and during the Relevant Period, the budget and

reforecasting challenges issued and maintained by senior management (including

by Mr Khan during the Relevant Period) became increasingly challenging and

difficult to achieve as major projects in CCS faced mounting operational and

financial difficulties. These challenges were issued to CCS and quantified at a

Divisional level, as opposed to being referable to individual projects. They

nonetheless put significant pressure on individuals within CCS to apply

increasingly aggressive contract accounting judgements in order to raise the

financial performance of projects to meet what the individuals believed were

unrealistic financial targets. This gave rise to the clear risk that these judgements

would not comply with the requirements of IAS 11 and would misreport the

financial performance of major projects within CCS. Carillion’s procedures,

systems and controls were not sufficiently robust or transparent to address this

risk.

Carillion’s internal policies on revenue and profit recognition

4.17.
The requirements of IAS 11 were reflected in internal policies adopted by Carillion

for financial reporting purposes. Carillion’s profit recognition policy applicable to

CCS construction projects during the latter part of 2016 and during the Relevant

Period provided, amongst other things, that:

(1)
potentially contentious claims against clients should only be recognised as

revenue where a good draft of the claim had been completed, it was

reasonably certain that the client would agree to the claim and the client

had the ability to pay;

(2)
if not agreed with the client, variations should only be recognised if

supported by a written instruction by the client and an assessment of the

client’s ability to pay; and

(3)
the recognition of any claims or variations must be approved by the Finance

Directors and Commercial Directors of the relevant Business Unit and

Business Division.

4.18.
The above judgements within CCS primarily involved personnel within the

Commercial and Finance functions within Carillion. The role of the Commercial

function was to manage the commercial aspects of projects, including any claims

or variations. The Finance function was responsible for the financial reporting of

projects, including ensuring compliance with applicable accounting standards and

internal policies, with ultimate responsibility resting with Mr Khan during the

Relevant Period. Decisions to recognise value associated with claims or variations

required input from both functions to assess recoverability and value, and ensure

that profits were appropriately recognised in Carillion’s accounts.

Application of contract accounting judgements and their reporting

within CCS

4.19.
During the Relevant Period, the application of contract accounting judgements

within CCS was dominated by the need to meet the very challenging financial

targets set and maintained by senior management (including Mr Khan). In

practice, this meant that the judgements were no longer made in accordance with

Carillion’s internal policies or on a “bottom up” basis as envisaged in the

forecasting process, but were aligned to meet the targets set and to maintain the

reported profitability of CCS’s major projects. These judgements did not reflect

the true financial position of the projects or the financial risks associated with

them. They did not comply with IAS 11, one of the applicable accounting

standards governing the recognition of revenue and costs associated with

construction contracts.

4.20.
These financial risks and potential exposures arising from these overly aggressive

accounting judgements were highlighted by CCS to Mr Khan and others on a

number of occasions and by various means, including by reporting on:

(1)
“hard risks” associated with CCS’s projects, which were amounts included

within budgeted forecasts, but which were considered by CCS management

as unlikely to be recovered;

(2)
potential exposures to amounts due on major projects by means of a

quarterly report known as the Major Contracts Summary; and

(3)
large and increasing divergences in the financial performance in relation to

certain major projects, making clear the increasingly large disparity for

those projects between the assessments of financial performance by project

and/or management teams within CCS and the financial performance as

reflected in Carillion’s budgeted forecasts.

4.21.
Mr Khan did not respond appropriately to these warning signs during the Relevant

Period. He did not adjust CCS’s financial targets in response to them. He also

did not report them to the Board or the Audit Committee (including in his own

reporting to those bodies), even though to his knowledge they were not otherwise

being reported, and even though he must have been aware, particularly having

regard to the nature and cumulative effect of the warning signs and the number

of occasions on which they were reported to him, that they would be highly

relevant to the deliberations of the Board and the Audit Committee. This meant

that the Board and the Audit Committee were unaware of the full extent of

financial risks and potential exposures within CCS and their significant increase

during the Relevant Period.

4.22.
There was no single, coherent process within CCS for making contract accounting

judgements and obtaining approval of them in accordance with Carillion’s policies

during the Relevant Period. Instead, the financial performance of CCS’s major

projects and accounting judgements associated with them were subject to review

and internal reporting by various processes involving the relevant Project Team,

Business Unit management, Business Divisional management, Mr Khan, Mr

Howson and ultimately the Board and the Audit Committee. These processes

ultimately determined how the financial performance of individual construction

projects was externally reported by Carillion to the market.

Internal reporting on major projects from Project Team up to Mr Khan

(i)
Contract Appraisals

4.23.
The Project Teams typically produced monthly Contract Appraisals for each major

project setting out the estimated end of life and current traded value, costs and

margin (“traded” referring to the amounts entered into Carillion’s financial

reports). These figures incorporated the Project Team’s ongoing judgements as

to the potential recoverability of claims or variations, or cost savings, as well as

any additional adjustments applied on top of the Project Team’s judgements

(typically known as “management adjustments” within CCS).

4.24.
These management adjustments applied in the latter part of 2016 and during the

Relevant Period were often the means by which the financial performance of

projects was adjusted upwards in order to meet budgeted forecasts in line with

the targets set for CCS. Carillion’s profit recognition policy specifically prohibited

“arbitrary management adjustments” and indicated that “items must be fully

documented and supported at all times”. However, the policy was not followed in

practice. There was no breakdown of the management adjustments applied to a

project identifying the reasons for them and the specific claims, variations or costs

to which they had been applied. Mr Khan was not himself involved in the making

of management adjustments (because they were made at Business Unit or

Divisional level). The practice of making management adjustments was one of the

tools used within CCS in response to the pressure placed on CCS to meet very

challenging financial targets. This tool was used increasingly during the latter part

of 2016 and the Relevant Period in order to maintain the reported profitability of

projects, despite the increasing risks. Mr Khan was aware that between January

2016 and November / December 2016, these management adjustments had

increased by around £120 million to around £245 million within CCS. He was also

aware in April 2017 that they had increased to approximately £310 million by

February / March 2017.

(ii)
Performance Review Meetings

4.25.
The operational, commercial and financial progress of projects within CCS were

considered at Performance Review Meetings. The following PRMs dealing with

major projects took place each month:

(1)
a PRM for each individual major project, typically attended by the relevant

Project Team and Business Unit and Divisional management, and sometimes

by Mr Howson;

(2)
a Business Unit PRM for each Business Unit, typically attended by Business

Unit and Divisional management;

(3)
a Divisional PRM for each Business Division, typically attended by Business

Divisional management and Mr Khan during the Relevant Period. Mr Khan

also attended Divisional PRMs on a less frequent basis during the latter part

4.26.
Discussions at PRMs would include discussion of claims, variations and costs on

different projects, and the challenges or opportunities associated with them,

including their recovery strategy. Despite the potential significance of these

discussions in the context of financial reporting around projects, they were not

minuted and the only record made was a list of agreed actions.

(iii)
Budgeting and reforecasting process

4.27.
The PRMs played an important role in the context of Carillion’s budgeting and

forecasting process. This process involved a budget being produced in October to

December each year, with three to four reforecasts (known as RF1, RF2, etc)

throughout the year.

4.28.
As explained above, this process was intended to be “bottom up” and submissions

would be reviewed at Business Unit and Divisional PRMs before being submitted

to the Group finance function and ultimately the Board for approval.

4.29.
The budget and reforecast submissions would be subject to challenge in the form

of revised financial targets, first by management of the relevant Business Division

and subsequently by the Group FD. The pressure to meet challenges imposed and

maintained by senior management (including Mr Khan) required the Project

Teams, Business Units and Business Divisions to work out ways of delivering the

revised revenue and profitability targets. During the Relevant Period, this was

done within CCS by, amongst other things, using increasingly aggressive

judgements as to the likely recoverability of claims, variations and anticipated

cost savings on major projects, including by means of ever larger management

adjustments to maintain profitability and the use of negative accruals and “audit

friendly” Position Papers (see paragraphs 4.50 and 4.51 below).

(iv)
Hard risk

4.30.
The management of CCS and its associated Business Units had significant

concerns about the increasing levels of risk associated with these judgements.

Those risks were highlighted within CCS and to Mr Khan and others during the

latter part of 2016 and the Relevant Period by means of reporting (what was

known as) “hard risk” and via a management report called the MCS.

4.31.
CCS categorised risk associated with contract accounting judgements as “hard

risk” or “soft risk”. Hard and soft risks represented attempts to quantify and report

on financial risks associated with CCS’s projects, typically in the context of

Carillion’s budgeting and reforecasting processes. As Mr Khan was aware, hard

risks were amounts included within budgeted forecasts, but which were assessed

by CCS as unlikely to be recoverable. Soft risk was understood within CCS to be

amounts deemed recoverable, albeit there might still be challenges and recovery

was not certain. The reporting of hard risk in PRMs and as part of the budgeting

and reforecasting processes was considered to be especially important by

individuals within CCS in order to highlight internally the risks associated with the

increasingly aggressive contract accounting judgements being applied during the

Relevant Period.


4.32.
As explained below (see paragraphs 4.57 and 4.58), Mr Khan attended CCS PRMs

in the latter part of 2016 and during the Relevant Period at which the forecast

level of hard risk was highlighted as part of the budgeting and reforecasting

process. By October 2016, the hard risk internally reported in the CCS PRM, in

which Mr Khan attended, amounted to around £172 million. This increased to

£258.4 million by the end of December 2016 and to £310.6 million by April 2017.

(v)
Major Contracts Summary and Major Contracts Review Meeting

4.33.
The MCS was a quarterly report submitted by the Business Divisions to (amongst

others) Mr Khan, prior to and during the Relevant Period. It highlighted financial

exposures arising from contentious amounts due on individual major projects,

including claims, flagging the projects with a “red”, “amber” or “green” status. It

specifically highlighted where a likely recovery was less than Carillion’s current

forecast, resulting in an exposure that might need to be written off or could call

into question under IAS 11 the recognition of any revenue, and therefore of any

profit, with respect to those projects. There was, however, no guidance provided

to the Business Divisions for completing the report, which led to a lack of clarity

and consistency in the figures submitted by different Business Divisions. The MCS

nonetheless showed large and increasing exposures across different Business

Divisions (including CCS) in the latter part of 2016 and during the Relevant Period.

4.34.
In October 2016, the MCS identified a “likely” exposure of £173.2 million within

CCS (up from £159.9 million in July 2016), with 11 out of 16 named projects

marked with a red flag status. By May 2017, this had increased to a “likely”

exposure of over £430 million, with all bar two projects marked with a red flag

status.

4.35.
The MCS was discussed at Major Contracts Review Meetings typically attended in

2016 and during the Relevant Period by (amongst others) Mr Khan and

management from each Business Division.

(vi)
Peer review

4.36.
Separate to the reporting processes described above, major projects were also

subject to peer reviews which were carried out as part of Carillion’s internal audit

programme. They involved a review of selected projects undertaken by

experienced contract managers from another part of the business. The review

included consideration of the financial position of the relevant project and the

contract accounting judgements applied to it. During the latter part of 2016 and

the Relevant Period, the peer review recommendations on certain major projects

identified significantly worse financial performance than the budgeted forecasts.

There was, however, no formal process to ensure that a peer reviewer’s

recommendations were taken into account and no meaningful action taken in

response, although as part of internal audit presentations to the Audit Committee,

peer review recommendations were identified as being tracked and implemented.

4.37.
Mr Khan did not receive peer review reports, although he was aware of the

process.

Reporting to the Board and the Audit Committee

4.38.
Mr Khan was a member of the Board throughout the Relevant Period. Prior to this,

in his capacity as Group FC, Mr Khan had attended a number of Board Meetings

in the latter part of 2016. Mr Khan also attended and reported to the Audit

Committee in both his role as Group FD and Group FC. Mr Howson was the only

other executive director who was a member of the Board during the Relevant

Period.

4.39.
Mr Khan was responsible in his role as Group FD for ensuring that the Board and

in particular the Audit Committee had sufficient information to provide proper

oversight of Carillion’s financial reporting, including significant contract accounting

judgements being applied and their impact on the overall Group results. The Audit

Committee’s Terms of Reference during the Relevant Period stated, amongst

other things, that the Committee would review and where necessary challenge

“whether the Company has followed appropriate accounting standards and made

appropriate estimates and judgements, taking into account the views of the

external auditors”.

4.40.
The internal reporting of hard risks, potential exposures in the MCSs and the large

and increasing divergences from budgeted forecast in the financial performance

of certain major projects represented significant and increasing financial risks

associated with overly aggressive contract accounting judgements being applied

within CCS during the latter part of 2016 and the Relevant Period. These risks

were known to Mr Khan both prior to and during the Relevant Period and he must

have been aware, particularly having regard to the nature and cumulative effect

of the information he received regarding these risks and the number of occasions

on which it was reported to him, that they would be highly relevant to the

deliberations of the Board and the Audit Committee. However, as Mr Khan was

aware, these risks were not being disclosed to the Board or the Audit Committee

(through his own reporting or otherwise). Instead, the Board and the Audit

Committee received different reports that painted a broadly positive picture and

failed to highlight the increasing financial risks arising within CCS during the

Relevant Period.

4.41.
The Board received two key reports dealing with (amongst other things) the

financial performance of CCS’s projects: Major Project Status Reports and

Overtrade Reports. Neither report showed the financial risks associated with

increasing management adjustments, hard risks, MCS exposures, divergences

from budgeted forecasts for major projects or variances to peer review

recommendations. Instead, they identified much lower levels of risk associated

with contract accounting judgements and largely maintained the status quo in

terms of the reported financial performance of major projects.

4.42.
MPSRs were quarterly reports on the estimated end of life and current traded

value, costs and margin for individual major projects, with commentary about

progress on each project and major issues and risks. The individual reports were

summarised in a MPSR Executive Summary that identified the value and margin

associated with each major project, together with any changes. Only the MPSR

Executive Summary would be submitted to the Board after it had been reviewed

and approved by Mr Khan as Group FD during the Relevant Period and by Mr

Howson as Group CEO.

4.43.
Notwithstanding the significantly increasing financial risks within CCS, the figures

in the MPSRs and the MPSR Executive Summary throughout the Relevant Period

were aligned to the latest budget or reforecast figures for each project. This

practice had developed in accordance with the previous Group FD’s instructions

and Mr Khan maintained it. This meant that the MPSRs and the MPSR Executive

Summary failed to highlight any inconsistencies between the latest budget or

reforecast and the assessment of the relevant Project Team, Business Unit or

Business Division. Mr Khan received the information which was inconsistent with

the MPSRs. The MPSRs also did not highlight the management adjustments

applied to the projects, amounts identified as hard risk, exposures in the MCS or

variances to peer review recommendations.

4.44.
The Overtrade Report showed the value of construction revenue traded by

Carillion on projects, but not certified by the client. Certification is the formal

acceptance by a client that work has been completed satisfactorily, allowing

payment for it to be made. Revenue traded but not certified represented revenue

that Carillion was recognising in its management accounts for work that was not

yet formally approved by the client. This included revenue recognised in relation

to claims or variations that had not yet been agreed with the client.

4.45.
The Overtrade Report was regarded within Carillion as an important indicator of

the amount of revenue subject to contract accounting judgements that was being

recognised in Carillion’s management accounts at a particular point in time. It

was appended to Carillion’s monthly management accounts circulated to the

Board and separately provided to the Audit Committee.

4.46.
Mr Khan understood the importance of the Overtrade Report and believed that it

was supposed to depict where revenue had been recognised in Carillion’s financial

reports, despite it being contentious. Despite these matters, Mr Khan knew the

figures reported in the Overtrade Report did not identify hard risks, the potential

exposures reported in the MCS or divergences from budgeted forecast in the

financial performance of certain major projects. On 23 February 2017, Mr Khan,

the Group FD at the time, acknowledged that “there was not a consistent practice”

between Business Divisions in relation to revenue traded but not certified, “a

position which had evolved over a number of years”.

4.47.
The Board did not review contract accounting judgements collectively or on

individual projects as a matter of course. As well as the MPSR Executive Summary

and Overtrade Report, the Board received regular operational updates on major

projects, but these did not typically cover financial performance. Other

management information provided to the Board (such as budgets or monthly

management accounts) included financial information and reflected contract

accounting judgements at an aggregate level only.

4.48.
The Audit Committee received the Overtrade Report, but not the MPSR Executive

Summary. Following the financial period end at half or full year, the Group FD also

submitted a report to the Audit Committee identifying the financial risks and key

judgements associated with major projects. This typically identified the forecast

end of life margin for each major project and stated the value that would need to

be achieved through claims, variations or cost savings in order to achieve that

margin. It did not, however, explain the basis of the judgements made or describe

the financial risks associated with them. It did not identify the level of

management adjustments being applied, hard risks, the MCS exposures,

divergences from budgeted forecast in the financial performance of certain major

projects or variances to peer review recommendations. The values identified in

the Group FD’s Report were also different to, and at times inconsistent with, the

figures in the Overtrade Report.

Carillion’s financial statements and Position Papers provided to the external
auditors


4.49.
For each financial reporting period, Position Papers on major projects were

prepared by Business Units for the purposes of the external auditors’ half and full

year audit work. They set out the financial position of selected projects in terms

of the estimated end of life and currently traded value, costs and margin. They

identified the amounts being recognised in relation to claims, variations and costs,

but only provided limited narrative or other explanation as to the judgements

being made. They were reviewed at Divisional and Group level, as well as

provided to the external auditors. The figures set out in the Position Papers were

broadly equivalent to the MPSRs and reflected the amounts recognised for those

projects in Carillion’s financial statements.

4.50.
The Position Papers did not refer to the financial risks associated with hard risks,

MCS exposures or divergences between the latest budget or reforecast and the

assessment of the Project Team, Business Unit or Business Division. Typically, the

Position Papers would be sent to the Group FC and to the Group FD for

consideration before being provided to the external auditors. Mr Khan, as Group

FC, initiated the process for preparing Position Papers for the 2016 year-end

accounts by instructing members of the Group Finance team to send out a list of

selected contracts which would form the subject of the Position Papers. They were

reviewed at Divisional and Group level as well as provided to the external auditors.

Mr Khan reviewed the Position Papers prepared for the purpose of the 2016 year-

end. They were sent to the external auditors in January 2017, when Mr Khan was

Group FD. Notwithstanding Mr Khan’s role as Group FD and his review of the

Position Papers, he did not inform the external auditors of the matters referenced

above, namely hard risk, MCS exposures and the divergences between the Project

Team’s assessments and what was traded.

4.51.
For certain major projects, two versions of Position Papers were produced for the

2016 year-end: a “clean” version reflecting the Project Team’s assessment of the

project’s financial position; and an “adjusted” version for the external auditors

showing a much-improved financial position. The adjusted version was regarded

by the Business Unit as more “audit friendly” because it did not disclose the overly

aggressive nature of the judgements being applied to maintain the budgeted

margin and the associated risks to the project’s reported financial performance.

The external auditors were unaware that a separate, clean version of the Position

Paper had been produced reflecting the Project Team’s much more conservative

assessment. The preparation of “clean” and “adjusted” Position Papers was one

of the tools used within CCS in response to the pressure placed on it to meet very

challenging financial targets. Mr Khan only received the “adjusted” version, but

he was aware that two versions of Position Papers had been produced, in relation

to certain major contracts, for the purpose of the 2016 year-end accounts.

Notwithstanding this, he did not take any steps during the Relevant Period to alert

the external auditors to this.

SECTION E: EVENTS LEADING UP TO THE ANNOUNCEMENTS

Increase in exposures and risks associated with contract accounting

judgements during the second half of 2016

4.52.
The second half of 2016 saw significant increases in the exposures and levels of

risk associated with Carillion’s contract accounting judgements being reported

internally for CCS and the Group as a whole. For CCS, these increases reflected

significant deteriorations in the financial performance of certain major projects

within CCS as described in Section G below. They were highlighted by CCS to Mr

Khan, in his capacity as Group FC, and others at that time. Mr Khan must have

been aware, particularly having regard to the nature and cumulative effect of the

information he received and the number of occasions on which these increases

were reported to him, that they would be highly relevant to the deliberations of

the Board, the Audit Committee and external auditors. However, they were not

reported to the Board, the Audit Committee or the external auditors either before

or during the Relevant Period.

July, October and December 2016 MCSs

4.53.
In July 2016, the MCS identified a “likely” exposure (ahead of any write-offs) in

relation to contentious amounts considered due (e.g. via claims) to the Group as

a whole of £439.9 million. The equivalent figure for CCS was £159.9 million

(representing 66% of the contentious amounts considered due to CCS). The “best”

case scenario in the MCS anticipated an exposure of just over £136 million for

CCS (i.e. 56% of contentious amounts due).

4.54.
By October 2016, the “likely” exposure in the MCS had increased to £566.6 million

for the Group and to £173.2 million for CCS. The figure for CCS represented 71%

of the contentious amounts considered due. The “best” case scenario in the MCS

was an exposure of just under £142 million for CCS (i.e. 58% of contentious

amounts due).

4.55.
The MCS figures for December 2016 showed “likely” exposures of over £550

million for the Group and £157.8 million for CCS. The CCS figure had slightly

decreased from October 2016 because it omitted a figure for AWPR. In December

2016, AWPR was separately reporting via the CCS PRM a likely exposure of £68

million against its traded margin (a loss of £10 million). Taking this into account,

the “likely” exposure for the Group was £618.7 million and for CCS was £225.8

million in December 2016.

4.56.
During the latter part of 2016, the MCSs (when taken together with the CCS PRM

in December 2016) identified increases of £178.8 million for the Group and £65.9

million for CCS in the level of “likely” exposures. Mr Khan attended the MCRMs in

July, October and December 2016 and received the MCSs for which they were

prepared. Despite the reporting of these exposures, no steps were taken to

address them. Whilst responsibility for addressing these exposures did not fall to

Mr Khan until the Relevant Period, he was nevertheless aware of these issues on

commencing his role as Group FD. Notwithstanding this, he failed to take any

meaningful steps to address them in the Relevant Period.

Hard risk reported in August and October 2016 and January 2017

4.57.
In August 2016, CCS’s RF3 flash presentation forecast hard risk for the end of

2016 of £172.7 million, including £61.8 million of new hard risk since January

2016. This was an increase of new hard risk of £36.1 million from RF2 in April

2016. This presentation was emailed to Mr Khan on 11 August 2016.

4.58.
In October 2016, CCS’s Profit Update Year End & Budget forecast a similar level

of hard risk of £171.8 million for 2016, with £149.6 million of hard risk forecast

by the end of 2017. Mr Khan attended this presentation.

4.59.
In January 2017, CCS was reporting in its PRM that hard risk had increased to

£258.4 million by the end of December 2016. Mr Khan was in attendance at this

4.60.
As a result, the hard risk forecast reported by CCS increased by £61.8 million

between January and August 2016 and by a further £85.7 million between August

and December 2016. Mr Khan understood that hard risk represented amounts

viewed by CCS as unlikely to be recovered. This was indicated in an email

forwarded to him on 6 March 2016 specifically referring to “what is hard risk vs

genuinely collectable”. Mr Khan did not take any meaningful steps, on becoming

Group FD, to understand, assess or address the increasing levels and accumulated

values of hard risk reported.

Lack of proper reporting to the Board and the Audit Committee about increasing

financial risks and exposures

4.61.
The significant increases in likely MCS exposures and high levels of hard risk

during the second half of 2016 were not highlighted to the Board or the Audit

Committee, or set out in Position Papers sent to the external auditors. Mr Khan

was aware of what was being reported to the Audit Committee in the latter part

of 2016 as he attended this committee during this period and was responsible for

producing most of the first drafts of documents contained in the Audit Committee

packs. Mr Khan was also aware of what was being reported to the Board in the

latter part of 2016 as he began to attend Board meetings during this period. He

was also responsible for reviewing the Group FD’s Report and CEO Reports that

were included in the Board packs. The Board was regularly updated during this

period as to operational developments on major projects, but not their financial

impact or the accounting judgements made on individual contracts.

4.62.
The financial information available to the Board and the Audit Committee about

these matters at CCS level during the latter part of 2016 and the Relevant Period

was contained in Overtrade Reports. The Overtrade Reports issued to the Board

and the Audit Committee between July and December 2016 showed no significant

increase in risk for the Group or CCS. In addition, the Overtrade Reports did not

provide the Board or the Audit Committee with information about what those

within CCS considered were likely exposures – instead the reports showed

revenue “traded not certified” (i.e. amounts that had not yet been agreed with

the client which were reported as being appropriate to recognise as revenue). In

these Reports, construction revenue traded but not certified was consistently

reported at around £295 million for the Group, as was the equivalent figure for

CCS at around £42 to £44 million. These figures do not reconcile with or convey

the much higher likely exposures and hard risks described above.

4.63.
In August 2016, a member of the Audit Committee sent an email to the then

Group FD, Mr Adam, which was also forwarded separately to Mr Khan, asking

whether contract accounting judgements being made and their linkage to the

financial statements could be made clearer because “trying to assess the

judgemental risks/opportunities is difficult”. As Mr Khan was aware, a member of

Group Finance replied stating that this issue would be reviewed going forward.

Despite this, no substantive changes were made, prior to or during the Relevant

Period, to the level of information being provided to the Audit Committee.

No increase in provisions

4.64.
The level of provisions against risks associated with major projects was reported

to the Board each month as part of the monthly management accounts. Total

provisions for the Group reviewed by the Board were consistently maintained at

£27.1 million throughout 2016, with other provisions and contingencies increasing

this to £50.1 million in total by the 2016 year-end. The amount of provisions and

contingencies allocated to CCS remained broadly at £16.9 million. There was no

material increase in the size of the provisions or contingency to address the

increasing exposures identified in the MCS and the high levels of hard risk

internally reported by CCS.

The December Announcement

4.65.
The market consensus for Carillion’s underlying profit before tax was around £180

million for the 2016 full year. In early December 2016, Carillion was considering

how to meet this expectation and was exploring possible one-off transactions or

introducing more “stretch” for CCS in order to bridge a perceived Group PBT

shortfall of £33 million against market expectations. In the end, the gap was

bridged for the Group in part by means of a one-off transaction with an

outsourcing supplier, which delivered an additional £20 million of profit for 2016.

This enabled Mr Adam to report to the Board “The positive news that our overall

expectations for Group profit and earnings are broadly in line with our

expectations enabled us to keep the consensus forecasts for total underlying profit

and earnings broadly unchanged.”

4.66.
The trading performance of the Group was discussed at a Board meeting on 6

December 2016, including risks to Carillion’s year-end profit forecast. Mr Khan

was in attendance at this meeting. Board members emphasised their reliance

upon the “judgment of the executive” (i.e. the Group FD and CEO) in relation to

certain major projects, including AWPR, as well as the need to “understand

whether trading performance of the business had deteriorated”. They were not

informed, however, about the increasing exposures in the MCSs or the high levels

of hard risk within CCS. No specific consideration was given as to possible

changes to the proposed wording of the December Announcement, which was

approved for release at this Board meeting.

4.67.
Carillion published its Full Year Trading Update (i.e. the December Announcement)

on 7 December 2016. The December Announcement was headed “Meeting

expectations led by a strong performance in support services”. It referred to

“expected strong growth in total revenue and increased operating profit”. For

Construction Services (excluding the Middle East), Carillion reported that “We

expect a solid revenue performance in this segment, with the operating margin

remaining within our target range of 2.5 per cent and 3.0 per cent. This result

once again reflects our selective approach to choosing the contracts for which we

bid in order to focus on maintaining a healthy operating margin”. In terms of

outlook, the December Announcement stated that Carillion was “well positioned

30

to make further progress in 2017”. The announcement did not mention or reflect

the increasing financial risks being reported within CCS. Carillion’s share price fell

3% on the announcement.

The March Results Announcement

4.68.
At the Board meeting on 26 January 2017, concerns were expressed by two Board

members about lack of clarity over the Group’s trading performance towards the

end of 2016 and the need for transparency and clarity “particularly if the position

had deteriorated in the year”. Mr Khan (now Group FD) noted in response that

trading for the last two months of 2016 was in line with forecast. This was broadly

consistent with the MPSR Executive Summary for January 2017, which showed no

material deterioration in the financial performance of CCS’s major projects since

the previous quarter.

4.69.
However, it was not consistent with the MCS in February 2017. This showed a

likely exposure of £528.4 million (ahead of any write-offs) for the Group and of

£149.2 million for CCS. These exposures excluded any figures for two of the

largest contracts within CCS (AWPR and RLUH).

4.70.
Mr Khan received the February MCS and was aware that, at around this time,

Infrastructure was estimating a loss equivalent to an exposure of £68 million

against its traded margin (-£10 million), and RLUH’s Project Team was estimating

a likely loss of £56.3 million (which equated to an exposure of almost £68 million

against its traded margin). The inclusion of these figures in the MCSs would have

increased the likely exposure to £664.4 million for the Group and to £285.2 million

for CCS. This was an increase in exposures since December of £45.7 million for

the Group and of £59.4 million for CCS.

4.71.
Final Position Papers for selected contracts had been submitted to the external

auditors on 11 January 2017. The margin recorded in these position papers was

broadly consistent with the MPSRs prepared for January 2017. The Position

Papers did not disclose the increase in hard risk since August 2016, the likely

exposures identified against some of these projects in Major Contract Summaries

between July and December 2016, the scale of management adjustments being

applied to them, the deterioration in the Project Teams’ and Infrastructure’s

assessment of their financial performance, or variances to peer review

recommendations.

4.72.
On 23 February 2017, the Audit Committee met to review the draft 2016 Annual

Report and Accounts. Mr Khan was in attendance at this meeting. The Group FD’s

Year-End Report prepared by Mr Khan referred to construction revenue traded not

certified of £294 million for the Group and of £44 million for CCS, as set out in an

appended Overtrade Report. It also identified the key judgements made in

relation to major projects across the Group (including within CCS) and the claim

recoveries and costs savings necessary in order to meet the margins traded for

these contracts in Carillion’s accounts. The Year-End Report asserted that a total

provision of £17 million was appropriate at the year-end for the Construction

Services segment (including CCS and Canada). This, when combined with other

provisions and contingencies, gave a year-end provision for CCS of £16.9 million.

4.73.
The Year-End Report did not comment upon the merits of the claims, the likelihood

of successfully achieving the recoveries or cost savings, or the Project Teams’ and

Infrastructure’s assessment of deteriorating financial performance in certain

major projects. It did not identify the large financial risks associated with them,

for example as reflected in hard risks, the exposures identified in the MCS, the

level of management adjustments being applied and variances to peer review

recommendations. It was also inconsistent with the appended Overtrade Report

with regard to AWPR, insofar as AWPR had a nil value cited in the Overtrade

Report compared to a claim of £30 million against the client referenced in the

Group FD’s Report.

4.74.
During the meeting, an Audit Committee member commented that the projects

were complex and it was difficult to second-guess management judgements. This

emphasised the importance of ensuring that those judgements were appropriately

made and disclosed to the Audit Committee. It was also acknowledged by Mr

Khan at the meeting that there was not a consistent practice between Business

Divisions for completing the Overtrade Report and that a new methodology for

reporting uncertified balances would be adopted. This was not implemented by Mr

Khan during the Relevant Period.

4.75.
The 2016 Annual Report and the March Results Announcement were reviewed by

the Audit Committee at its meeting on 23 February 2017, approved at the Board

meeting on 28 February 2017 and published on 1 March 2017. There were no

material changes in this announcement to the expectations that had been

communicated to the market in the December Announcement.

4.76.
The March Results Announcement was headed ‘Performance in line with

expectations’. It referred to revenue of £4,394.9 million for the Group (an

increase of 11% from 2015), with PBT of £178 million (a 1% increase from 2015).

4.77.
The attached document published with the March Results Announcement stated

for “Construction services (excluding the Middle East)” that “Revenue grew

strongly by 21 per cent to £1,520.2 million (2015: £1,258.3 million), driven by

growth in the UK where revenue increased to around £1.5 billion (2015: £1.2

billion), reflecting a number of high-quality contract wins for both infrastructure

and building over the last 18 months”. It went on to state that “Underlying

operating profit increased to £41.3 million (2015: £37.8 million) with an operating

margin of 2.7 per cent (2015: 3.0 per dent), which remains within our target

range of 2.5 per cent to 3.0 per cent”. It described the ambition for 2017 in this

business segment was “to maintain revenue and profit broadly at their current

levels”.

4.78.
The Chairman’s statement in the March Results Announcement stated that

Carillion had a “good platform from which to develop the business in 2017. We

will accelerate the rebalancing of our business into markets and sectors where we

can win high-quality contracts and achieve our targets for margin and cash flows,

while actively managing the positions we have in challenging markets”. The

statement about “challenging markets” was a reference to markets in the Middle

East and Canada. There was, however, no reference to challenges in UK

construction contracts.

4.79.
Market analyst reports following the March Results Announcement broadly noted

that the results were in-line with expectations, with a focus on debts and the

performance of projects in support services, the Middle East and Canada.

Following the announcement, Carillion’s share price fell by 5%.

4.80.
Mr Khan, as Group FD, was closely involved in drafting and finalising the March

Results Announcement and the 2016 Annual Report. He was listed as the first

point of contact on the March Results Announcement. He was responsible for

coordinating, overseeing and finalising the content of the March Results

Announcement. As a member of the Board, he, along with the rest of the Board,

gave final approval before the March Results Announcement and the 2016 Annual

Report were published. He signed the statement of responsibility in respect of the

March Results Announcement and Annual Report. This statement asserted that

“The preliminary announcement complies with the Disclosure and Transparency

Rules (DTR) of the United Kingdom’s Financial Conduct Authority. The preliminary

announcement is the responsibility of, and has been approved by, the Directors

of Carillion plc ..[…] the financial statements contained in the 2016 Annual Report

were prepared in accordance with applicable accounting standards and gave a

true and fair view of the assets, liabilities, financial position and profit of the

Company […] the 2016 Annual Report and Accounts, taken as a whole, are fair,

balanced and understandable, and provide the information necessary for

shareholders to assess the Company’s financial position, performance, business

model and strategy”.

SECTION F: RECOGNITION OF THE NEED FOR A PROVISION

Events following publication of the 2016 year-end results

4.81.
By March 2017, the hard risk for CCS reported to Mr Khan had increased to £310.6

million. This was an increase of £137.9 million since the total level of CCS hard

risk was forecast in August 2016 and £52.2 million since hard risk was reported

at the CCS PRM on 18 January 2017.

4.82.
During April and early May 2017, the position continued to worsen. An MCS dated

4 May 2017 showed a likely exposure against contentious amounts due of £872.3

million for the Group and £431.9 million for CCS (representing 71% of the

contentious amounts due to CCS). This was an increase to the likely exposure of

£207.9 million for the Group and of £146.7 million for CCS since February 2017.

Mr Khan was aware of this increased level of exposure as he was in receipt of the

MCS for May 2017 and was in attendance at the MCRM for which this was

prepared.

4.83.
In April 2017, Mr Khan attended a CCS PRM which highlighted further

deteriorations in CCS contracts, notably RLUH, MMH and Battersea. These are

described in more detail in Section G below.

4.84.
A significant change in Carillion’s debt position was reported to and discussed at

a Board meeting on 3 May 2017. Mr Khan was in attendance at this meeting.

Concerns were raised by Board members during the course of that discussion that

trading was “going backwards”, a “significant number of major contracts were

deteriorating” and there were “too many problem contracts”.

4.85.
Later that same day, Carillion issued its AGM Statement (the May Announcement)

under the headings “Trading conditions unchanged” and “Positive work winning

performance”. The announcement stated that:

"Trading conditions across the Group's markets have remained largely unchanged

since we announced our 2016 full-year results in March. Consequently, we

continue to focus on the priorities we set out when we announced our 2016

results, namely to accelerate the rebalancing of our business into markets and

sectors where we can achieve our objectives for margins and cash flows; and to

manage challenging contract positions, particularly in our international markets,

as these are key to achieving our objective of reducing average net borrowing.”

4.86.
The reference to “challenging contract positions” was aimed at highlighting the

deterioration in the financial performance of Carillion’s contracts. As with the

March Results Announcement, however, the statement was explicitly linked to

Carillion’s overseas markets, not the UK, and so gave the misleading impression

that trading conditions in the UK market had not deteriorated.

4.87.
Mr Khan was closely involved in finalising the May Announcement. He was listed

as the first point of contact for the announcement. As with the March Results

Announcement, he was responsible for coordinating the preparation of the

announcement, reviewing drafts and approving their content before submission

to the Board. As a member of the Board, he was also responsible, with the other

Board members, for approving the May Announcement before publication.

4.88.
Following the May Announcement there was some market commentary relating

to challenging contracts in the Middle East, and the share price fell by 5%.

Negative accruals

4.89.
During April and May 2017, additional concerns were raised within CCS that “the

level of risk which is being held in the balance sheet appears too large relative to

the size of the business”. These concerns were prompted by the discovery of the

use of negative accruals within CCS, a practice that was generally prohibited in

Carillion’s accounting policies.

4.90.
Negative accruals (as prohibited by Carillion) describes the practice of using the

value of claims to reduce costs accounted for on a project, instead of recognising

the claim as revenue. This practice can be neutral from an accounting perspective

because the profitability of a project should remain the same, whether the claim

is recognised as a reduction to cost or an increase to revenue. Within Carillion,

however, accounting judgements around claims were reported and assessed

internally and to external auditors in the context of revenue recognition, not costs.

This enabled negative accruals to be used on certain major projects within CCS to

reduce costs by means of overly aggressive judgements on claim recoveries

without disclosing that fact in Position Papers seen by the external auditors. For

example, a claim for £8 million might have been recognised at the 2016 year-

end, of which £5 million was recognised as revenue and £3 million as a negative

accrual that reduced costs. The external auditors would only see a value of £5

million for the claim (i.e. the part recognised as revenue), not the additional £3

million recognised by means of the negative accrual. In this way, the profitability

on these projects could be maintained without subjecting the overly aggressive

accounting judgements being used to appropriate scrutiny.

4.91.
An email sent by an individual within CCS in April 2017 explained the use of

negative accruals as follows:

“Our profit targets have mean (sic) that we have not been able to write these

back to their correct positions. In order to get through audit with a justifiable

route-map we have had to suppress costs. This has, unfortunately been done by

applying negative accruals. Generally any overtrading we do push through is via

revenue adjustments rather than through costs but in these cases we couldn’t

produce a position paper that would get through audit. We asked the sites to

produce a “clean” version of the position paper so that we had full visibility of the

adjustments that were being made.”

4.92.
An internal Carillion investigation into the use of negative accruals was

commenced in April 2017, at which point Mr Khan was informed. The investigation

reported its initial findings to Mr Khan on 7 May 2017 (four days after the May

Announcement). It identified that the majority of negative accruals related to

four major contracts (including RLUH, Battersea and AWPR) and amounted to a

total of £102 million. It also identified that Business Units had used negative

accruals on certain contracts in CCS in response to pressure to “hold the position

[i.e. profit margin]”. This was a reference to the pressure to meet financial targets

imposed on CCS described at paragraph 4.16 above.

36

4.93.
On 9 May 2017, the Board was informed about the use of negative accruals and

a Board sub-committee was set up to oversee the internal investigation into their

use. The sub-committee did not include Mr Khan, but he (together with the Board

and the Audit Committee) was regularly updated as to the progress of the

investigation.

4.94.
As part of the internal investigation, the negative accruals were reversed so that

the full value of claims recognised at the 2016 year-end could be properly

assessed in order to determine whether or not a prior year adjustment was

required. The effect of reversing the negative accruals significantly increased the

reported costs of the projects and required much more value from claims to be

recognised as revenue in order to justify their originally reported year-end margin.

Using the above example of a claim for £8 million, the effect of reversing the

negative accrual meant that Carillion had to justify recognising the full £8 million

of the claim as revenue, not £5 million as originally disclosed internally and to the

external auditors. In its investigation, Carillion sought to justify the 2016 year-

end position by significantly increasing the value of certain claims and in some

cases introducing new claims or revenue streams that were said to have been in

management’s mind as at the year-end (albeit not recorded in the original Position

Papers in December 2016).

4.95.
Following the conclusion of this investigation, the Board concluded on 23 May

2017 that the value, costs and margin recognised at the 2016 year-end for each

contract could be justified following the investigation and there was therefore no

need to restate the 2016 year-end accounts. A lessons learnt report subsequently

submitted by Mr Khan to the Board noted that “Management need to be aware

that high-level instructions such as that to “hold the position” (i.e. maintain the

traded margin) may, if crudely implemented, have unintended consequences.”

Enhanced Contracts Review

4.96.
By late May / early June 2017, Carillion recognised that the deterioration in the

financial performance of its projects and increasing debt position meant it needed

to raise additional capital. It explored the possibility of a rights issue. As part of

any rights issue, Carillion was advised that it should de-risk its balance sheet.

This essentially meant reviewing the values of assets on its balance sheet,

including any values recognised in its accounts associated with variations or

claims on construction projects across the Group, and writing off any values

deemed to be at risk of non-recovery. This became known as the “Enhanced

Contracts Review”.

4.97.
The Enhanced Contracts Review took place over June and early July 2017. It

involved a review of 58 projects across the Group representing £1.58 billion of

receivables and 47% of Group revenue for the period ending 31 May 2017. The

review considered all aspects of the projects, including the judgements made on

each project in relation to variations or claims included in estimated end of life

forecasts.

4.98.
Mr Khan was involved in structuring the review process, as well as engaging

relevant internal and external resource. The review was conducted with assistance

from the external auditors, who do not appear to have been provided with details

of hard risks, MCS exposures, peer reviews or variances between the figures

contained in the “clean” and “adjusted” Position Papers. It concluded that the

traded value of a number of projects in Carillion’s construction business exceeded

the commercial assessment of those positions. It identified a possible exposure of

between £378 million and £693 million, and recommended a provision of £695

million. Given the magnitude of the proposed impairment, the external auditors

asked Carillion to consider whether any of the proposed provisions required a prior

year adjustment to its 2016 results. Carillion’s management, including Mr Khan,

considered 11 major contract positions to assess whether there was evidence that

should have been obtained and considered in preparing the Group’s 2016 year-

end results ahead of their publication on 1 March 2017. Carillion produced a paper

assessing the issues that gave rise to the provision on these projects and

considered whether those issues were known as at 31 December 2016. It

concluded that the challenges on these projects had crystallised after publication

of the 2016 results and no prior year adjustment was required.

4.99.
The recommended provision of £695 million was reported to the Audit Committee

at its meeting on 9 July 2017. The provision across CCS projects was £375 million.

Even with a provision at that level, certain projects retained values being traded

that were identified as being at risk. The decision was therefore taken to increase

the provision to £845 million to address those risks, which was later allocated to

specific projects in September 2017. No prior year adjustment was made.


38

Trading update on 10 July 2017

4.100. On 9 July 2017, the Board approved the Audit Committee’s recommendation. On

10 July 2017, Carillion announced the contract provision of £845 million as part

of a trading update, with £375 million being attributed to the UK and £470 million

attributed to overseas markets. It stated that the majority of the overseas

provision related to exiting markets in the Middle East and Canada.

4.101. Carillion’s share price fell 39% that day, and within three days had fallen by a

total of 70%.

4.102. In the provision announced by Carillion on 10 July 2017, the four largest

provisions within CCS were as follows:

(1)
RLUH: £68 million.

(2)
Battersea: £38 million.

(3)
AWPR: £86 million.

(4)
MMH: £48 million.

SECTION G: THE LARGEST WRITE-DOWNS ON UK MAJOR CONTRACTS

4.103. The facts relating to the above projects and their provisions are addressed below

to the extent to which they are relevant to the Authority’s findings against Mr

Khan as Group FD. This includes facts which either occurred during the Relevant

Period or, in instances in which the facts fall outside of this time frame, are

relevant to Mr Khan’s knowledge during the Relevant Period.

RLUH

4.104. RLUH was a project to construct a new Private Finance Initiative hospital located

on the existing Royal Liverpool University Hospital site. It started in February 2014

and was originally forecast to be completed in March 2017. The project was

operated by the Buildings Business Unit within CCS.

4.105. The tender value of the project was £286 million, with an estimated end of life

profit margin of £10.2 million (or 3.56%).

4.106. Despite significant delays in the project in 2015 and 2016, Carillion had increased

the end of life margin forecast associated with this project to £13.6 million (or

4.6%) by July 2016. The increased margin was maintained by the use of

management adjustments, increasing from £38.9 million in July 2016 to almost

£72 million by February 2017. During the latter part of 2016 and the Relevant

Period, the Board and the Audit Committee were not aware of the scale of

management adjustments and the divergence between the internal reporting

within CCS and what was being reported to them in relation to RLUH’s financial

performance.

4.107. There were significant and increasing divergences between (on the one hand) the

Project Team’s views on RLUH’s financial position and the financial risks reported

by CCS to Mr Khan and others; and (on the other hand) those reflected in

budgeted forecasts and/or reported to the Board and the Audit Committee during

the latter part of 2016 and the Relevant Period. These are illustrated in the

following graph:

Graph 1 - Each point on the graph shows the end of life (EOL) margin and/or traded to date margin
recorded in various reports pertaining to RLUH as variously reported to Building, CCS, the executive
directors, the Board, the Audit Committee and/or the external auditors. The orange and blue trend
lines illustrate the increasing divergence of views across the year between the position reported as
assessed by the Project Team and/or in peer reviews (blue line); and the view post-management
adjustments reflecting budgeted forecasts and/or reported to the Board, the Audit Committee and
the external auditors (orange line). The graph also shows the level of hard risk reported in hard risk
schedules and the “likely” exposure to traded amount reported in the Major Contract Summaries.
The red circles show the figures of which Zafar Khan was aware at that point in time (or subsequently
in the case of MPSRs), whether that was by way of being present in meetings or receiving information
directly by email.

4.108. This divergence between the internal reporting within CCS and the reporting to

the Board and the Audit Committee in the second half of 2016 is summarised

The Project Team’s assessments

(1)
The Contract Appraisals and other commercial reports prepared by the

Project Team from July to December 2016 reported a deteriorating end of

life margin loss for RLUH and increasing use of management adjustments to

achieve the forecast profit margin of 4.9%. These Appraisals and reports

were not seen by Mr Khan. He was, however, made aware of the Project

Team’s views by other means.

(2)
In September 2016, the Project Team sent a spreadsheet by email to Mr

Howson and certain Business Unit and Divisional management summarising

what it saw as the realistic end of life position for RLUH. This identified a

“clean end out forecast position” of a £50 million loss on the project, with

“realistic” recovery targets potentially reducing this to a £14 million loss and

other potential other benefits further reducing it to a £8 million loss. Mr

Howson forwarded the email and attached spreadsheet to Mr Khan.

(3)
The Project Team’s end of life margin forecast for RLUH was reported by

CCS at a £21 million loss in a “profitability workshop” in September 2016.

The same figure was highlighted in a CCS PRM in October 2016. Mr Khan

attended both of these meetings.

(4)
By November 2016, the Contract Appraisal was reporting an end of life

forecast loss of £38.9 million (or -12.6%) before any management

adjustments. This assessment was confirmed by a peer review in November

2016, which noted the use of management adjustments to maintain the

profit margin and described this as “extremely ambitious and would mean

full success with all claims identified”. The Authority has not seen any

evidence that Mr Khan was aware of this Contract Appraisal or peer review

prior to or during the Relevant Period.

CCS’s reporting to Mr Khan

(5)
CCS reported the Project Team’s views internally as described above. At

the profitability workshop in September 2016 attended by Mr Khan, CCS

reported that for RLUH a 4.7% margin (equivalent to an £11.3 million profit)

had been traded to date (i.e. recognised in Carillion’s financial reporting)

compared to the £21 million loss assessed by the Project Team. The

presentation indicated that the Project Team had been challenged to achieve

“breakeven” (i.e. no profit or loss).

(6)
At the CCS PRM in October 2016 attended by Mr Khan, the margin traded

for RLUH to date was reported by CCS as being £12.2 million compared to

the Project Team’s assessment of a £21 million loss (a difference of £33.2

million). The presentation highlighted hard risk of £10 million against RLUH,

having previously been assessed at £3 million in April 2016 and £7 million

in August 2016. Shortly after the year-end, this was further increased to

£23 million.

(7)
The July 2016 MCS reported a “likely” exposure to traded amount of £10

million for RLUH and assigned a “Red” flag status to the project. In the

October and December 2016 MCSs, this had increased to £21 million with a

“Red” status. This represented 100% (i.e. the full amount) of the

contentious amounts identified as due in these MCSs. Mr Khan received the

July, October and December 2016 MCSs, as well as attending the MCRMs at

which these MCSs were discussed.

Reporting to the Board and the Audit Committee

(8)
The MPSR Executive Summaries, Overtrade Reports, CEO and Group FD’s

reports to the Board and/or the Audit Committee did not reflect the Project

Team’s assessments or peer review recommendation as to the financial

performance of RLUH. They also did not highlight the financial risks

associated with RLUH, including the level of management adjustments being

applied or the hard risks and MCS exposures internally reported by CCS. To

that extent, they omitted highly material and relevant information

concerning RLUH’s financial performance during the Relevant Period.

Instead, the MPSR Executive Summaries, in particular, maintained an end

of life forecast profit of £13.6 million in July and October 2016 and of £13.2

million in January 2017 for RLUH and the Overtrade Reports identified £6

million or £8 million only as revenue traded not certified.

4.109. Mr Khan was in receipt of the MPSR Executive Summaries for July and October

2016. He attended Board meetings and sat on the Audit Committee in the latter

part of 2016 and therefore saw the Overtrade Reports submitted to them during

this period. He was therefore aware of the divergence between the forecast profits

and limited financial risks for RLUH being reported to the Board and the Audit

Committee by these means compared to what was being reported by the Project

Teams and CCS as described above.

4.110. Ahead of the 2016 year-end, two versions of the RLUH Position Paper were

produced by Building, a “clean” version reflecting the Project Team’s assessment

of a £38.7 million loss (-12.6% margin) and an “audit friendly” version

incorporating adjustments of £53 million to meet the forecast end of life profit of

£14 million (4.44% margin). The “audit friendly” version was used for the purpose

of preparing Carillion’s 2016 Annual Report and Accounts as announced on 1

March 2017; the external auditors were not provided with the “clean” version of

the Position Paper.







4.111. Mr Khan was aware of the existence of two versions of Position Papers for RLUH.

He received an email in November 2016 attaching various Position Papers and a

document titled “Carillion Building Position Paper Summary”. This document set

out “original” and “adjusted” figures for RLUH. Despite Mr Khan’s awareness of

the existence of two versions of Position Papers, he took no steps to ensure that

external auditors were aware of the “clean” and/or “original” figures for RLUH for

the purpose of the audit of Carillion’s 2016 Annual Report and Accounts, which

were finalised during the Relevant Period.

4.112. The final version of the Position Paper submitted to the external auditors for the

2016 year-end accounts showed a slightly reduced end of life margin of £13.2

million (or 4.42%), with costs of £286.1 million. This was seen and reviewed by

Mr Khan. It recognised £25.4 million as revenue to be recovered from claims

(excluding any additional claim amounts recognised by means of negative

accruals). As at the end of December 2016, all of these claims (which were not

subject to formal legal proceedings at that stage) were disputed or no response

had been received. Their progress was not sufficient to be deemed as “reasonably

certain” (as per Carillion’s internal policies) or “probable” (as per IAS 11) to be

recovered. No revenue should have been recognised in relation to them.

4.113. At the CCS PRM on 18 January 2017, the Business Unit reported the Project

Team’s estimated loss of £39 million (-13%) as at November 2016, with a

management adjustment of £53.9 million applied to help achieve a traded to date

margin of 4.7% (£11.7 million). Mr Khan, who by this time was the Group FD of

Carilion, attended this PRM.

4.114. The February 2017 MCS excluded any figures for RLUH and it was given a “Red”

flag status. Mr Khan received this MCS and attended the MCRM at which it was

discussed.

4.115. On 8 February 2017, the Project Team sent a briefing on RLUH to senior

management and certain Business Unit and Divisional management ahead of a

RLUH presentation at a CCS PRM on 10 February 2017. This PRM was attended

by Mr Khan. It included a financial analysis reporting a “realistic” estimated loss

of £56.3 million for RLUH as at 2 February 2017, with a “best case” loss of £43

million and “worst case” loss of £76.1 million.

4.116. This information was not communicated to the Board or the Audit Committee by

Mr Khan or, to his knowledge, by anyone else. The RLUH MPSR for January 2017

was consistent with the final Position Paper submitted to the external auditors in

reporting an estimated end of life margin of 4.4% (or profit of £13.2 million). The

Group FD’s Report, prepared by Mr Khan, submitted to the Audit Committee

meeting on 23 February 2017 referred to the need to achieve £25.5 million

recoveries in relation to claims to achieve the forecast end of life margin of 4.44%.

In their Audit Memorandum presented to the meeting, the external auditors noted

that “management [remain] confident of full recovery [on RLUH] due to the

number of routes available”. No reference was made to the Project Team’s

assessments of a significant loss, the scale of management adjustments being

applied, hard risks or MCS exposures, about which the Audit Committee and the

external auditors remained unaware.

4.117. On 1 March 2017, Carillion announced its 2016 financial results in its March

Results Announcement. The cost, value and margin recognised for RLUH as part

of the figures released in this announcement reflected the final Position Paper

provided to the external auditors in January 2017, with costs of £286.1 million

and a forecast end of life margin of 4.42% (i.e. a profit of £13.2 million). The

recognition of these amounts meant that the revenue and profit / margin figures

for the Group and Construction Services (excluding the Middle East) in the March

Results Announcement were materially misstated due to an understatement of

costs and the recognition of claims as revenue in non-compliance with Carillion’s

internal policies and IAS 11.

4.118. The financial performance of RLUH as reported internally continued to deteriorate

after March 2017. The Project Team’s forecast of a £49 million loss (-16.4%) as

at January 2017 was reported in the CCS PRM in March 2017, with a management

adjustment of £61.5 million being applied to help achieve a traded to date margin

of £11.7 million (4.6%). The CCS PRM in April 2017 reported that the Project

Team was estimating a loss of almost £60 million on RLUH as at February 2017,

with a management adjustment of almost £65 million being applied to help

support a traded to date margin of £11.7 million (4.5%). These traded to date

margins were equivalent to an end of life margin of over £13 million. Mr Khan

attended both of these PRMs. The MCS in May 2017 identified a likely exposure

of £71.5 million for RLUH. Mr Khan attended the MCRM for which the MCS was

prepared. He was also in receipt of the May 2017 MCS. Despite this, the Board

and the Audit Committee were not made aware by him, or to his knowledge

anyone else, of the Project Team’s forecast or reported exposures for RLUH.

4.119. The size of the MCS exposure of £71.5 million was reflected in CCS’s reporting at

a PRM attended by Mr Khan on 19 May 2017, which referred to the Project Team

estimating a loss of £59.3 million, with a management adjustment of £67 million

to help support a traded to date profit of £11.7 million as at March 2017.

4.120. On 7 June 2017, the Board held a strategy meeting attended by Mr Khan. At this

meeting, Mr Howson presented an “Overview of Key Contract Positions across the

Group”. In the presentation, RLUH was reported as having a forecast end of life

margin of £11.7 million (3%). This was expressly stated as including claims in

the forecast traded at 100% (i.e. the entirety of the claim values was recognised

in the forecast). At the CCS PRM on 22 June 2017 attended by Mr Khan, the

Project Team’s estimated loss was reported as being £62.6 million, with a

management adjustment of £74 million to help achieve a traded to date profit

figure of £11.7 million as at April 2017.

4.121. Following the Enhanced Contracts Review, £68 million was provided against RLUH.

This amount formed part of the contract provision of £845 million announced by

Carillion on 10 July 2017.








4.122. Battersea was a project to design and build a mixed-use development including

866 apartments, leisure facilities and retail units. The contract was signed on 27

December 2013 with an original contract completion date in September 2016.

4.123. The contract was tendered at a value of £443.7 million with a 0% profit margin.

4.124. Carillion encountered a number of issues with the Battersea contract in 2015 and

2016, which caused significant delays to the project. These issues in large part

arose from pressure caused by the client issuing a large volume of variations to

the work and the late provision of key utilities to the work site.

4.125. By January 2016, there had been a contract reset on Battersea which increased

the contract value to £472.4 million and extended the contract completion date

4.126. In July 2016, Carillion reported a positive end of life margin of £10.7 million

(2.2%) in the MPSR Executive Summary for Battersea. This increase in value was

partially attributed to a claim of £11.5 million for a further reset (“Reset 2”). By

contrast, the Project Team estimated a forecast end of life loss of £24.7m (-5%)

in July 2016. This gap continued to increase during the latter part of 2016 and

the Relevant Period and was bridged by means of large management adjustments,

rising from a management adjustment of £28.6 million in July 2016 to around £34

million in December. The Board and the Audit Committee were unaware of the

scale of management adjustments and the divergence between the internal

reporting within CCS and what was being reported to them in relation to

Battersea’s financial performance.

4.127. There were significant and increasing divergences between (on the one hand) the

Project Team’s views on Battersea’s financial position and the financial risks

reported by CCS to Mr Khan and others; and (on the other hand) those reflecting

budgeted forecasts and/or reported to the Board and the Audit Committee during

the latter part of 2016 and during the Relevant Period. These are illustrated by

the following graph:

Graph 2 - Each point on the graph shows the end of life (EOL) margin and/or traded to date
recorded in various reports pertaining to Battersea Power Station as variously reported to Building,
CCS, the executive directors, the Board, the Audit Committee and/or the external auditors. The
orange and blue trend lines show the increasing divergence of views between the position reported
as assessed by the Project Team and/or in peer reviews (blue line); and the view reflected in
budgeted forecasts and/or reported to the Board, the Audit Committee and the external auditors
(orange line). The graph also shows the level of hard risk reported in hard risk schedules and the
“likely” exposure to traded amount reported in the Major Contract Summaries. The red circles
show the figures of which Mr Khan was aware at that point in time (or subsequently in the case of
MPSRs), whether that was by way of being present in meetings or receiving information directly by
email.

4.128. This divergence between the internal reporting within CCS and the reporting to

the Board and the Audit Committee, in the second half of 2016, can be

summarised as follows:

The Project Team’s assessments

(1)
The Contract Appraisals prepared by the Project Teams from July to

December 2016 reported a deteriorating end of life margin loss for

Battersea. Increasing levels of management adjustments were applied to

the current traded value and costs to maintain a positive current traded

margin of just over 2% (a current traded profit margin of £8 million and

equating to an end of life profit of around £10 million). By December 2016,

the Project Team’s forecast in the Contract Appraisal had worsened to a

forecast end of life loss of £30 million, with end of life costs of £534.7 million

and a management adjustment of just under £34 million to maintain the

current traded margin of £8 million (or 1.8%). In October 2016, a peer

review report on Battersea recommended recognising an end of life loss of

£28 million.

(2)
The Contract Appraisals and peer review report were not seen by Mr Khan

but he was aware of the Project Team’s assessments by alternative means

as set out below.

CCS’s reporting to Mr Khan

(3)
CCS reported the Project Team’s views internally as described above. At

the profitability workshop in September 2016, attended by Mr Khan, CCS

reported that Battersea had a traded margin of 2.1% to date (equivalent to

just over £8 million) compared to the Project Team’s projected end of life

loss of £25 million, and that the Project Team had been challenged to

achieve “breakeven” (i.e. no profit or loss).

(4)
At the CCS PRM in October 2016, attended by Mr Khan, CCS reported the

margin traded to date on Battersea as being £8 million compared to the

Project Team’s assessment of a £14.8 million loss (a difference of £22.8

million). The presentation also highlighted hard risk of £13 million against

Battersea, the same as previously internally reported for that project.

(5)
The July, October and December 2016 MCSs reported a “likely” exposure of

£21 million for Battersea and assigned a “Red” flag status to the project.

This exposure represented 53% of the contentious amounts of £39.9 million

identified in the MCSs as due on Battersea. Mr Khan received the July,

October and December 2016 MCSs, as well as attending the MCRMs at which

these MCSs were discussed.

Reporting to the Board and the Audit Committee

(6)
The MPSR Executive Summaries, Overtrade Reports, CEO and Group FD’s

reports presented to the Board and the Audit Committee did not reflect the

Project Team’s views or peer review recommendation as to Battersea’s

financial performance. They also did not highlight the financial risks

associated with Battersea, including the level of management adjustments

being applied or the hard risks and MCS exposures reported by CCS. To

that extent, they omitted highly material and relevant information

concerning Battersea’s financial performance during the latter part of 2016

and the Relevant Period.

(7)
Instead, during the latter part of 2016 and the Relevant Period, the MPSR

Executive Summaries showed only a minor deterioration in end of life margin

from £10.7 million (or 2.2%) in July 2016 to £10.1 million (or 2%) in

October 2016 and £8.6 million (or 1.7%) in January 2017. The Overtrade

Reports similarly only identified a small increase in revenue traded not

certified, from £4 million in July 2016 to £6 million in December 2016.

(8)
Mr Khan was in receipt of the MPSR Executive Summaries for July and

October 2016 and January 2017. He attended Board meetings and sat on

the Audit Committee in the latter part of 2016 and therefore saw the

Overtrade Reports submitted to them during this period. He was therefore

aware of the divergence between the forecast profits and limited financial

risks for Battersea being reported to the Board and the Audit Committee by

these means compared to what was being reported by the Project Teams

and CCS as described above.

4.129. At the 2016 year-end, two sets of figures were produced when drafting the

Position Papers for the external auditors as described at paragraph 4.51 above,

including for Battersea. The “clean” Position Paper for Battersea reported a

forecast end of life loss of £25.6 million; the “audit friendly” version incorporated

adjustments to maintain a positive end of life margin of £8 million, a difference of

£33.6 million.

4.130. The final version of the Position Paper for Battersea submitted to the external

auditors for the 2016 year-end accounts reflected the “audit friendly” version.

This was seen and reviewed by Mr Khan. It recognised £28.6 million of revenue

by means of claims, an increase of over £21 million compared to the amount of

£7 million for claims recognised in the “clean” Position Paper. The claim figure of

£28.6 million appears to reflect sums associated with Contract Reset 2. On 31

December 2016, it was not “probable” that Contract Reset 2 would be approved

nor was it supported by “a client written instruction” (as per IAS 11 and Carillion’s

own policies). Therefore, no revenue should have been recognised in relation to

Contract Reset 2. The Position Paper for Battersea reported end of life costs of

£516.4 million, £18.3 million lower than the Project Team’s view at this time.

4.131. Mr Khan was aware of the existence of two versions of Position Papers for

Battersea. He received an email in November 2016 attaching various Position

Papers as well as a document titled “Carillion Building Position Paper Summary”.

This set out “original” and “adjusted” figures for Battersea. Despite Mr Khan’s

awareness of the existence of two versions of Position Papers, he took no steps

to ensure that the external auditors were aware of the “clean” and/or “original”

figures for Battersea for the purpose of the audit of Carillion’s 2016 Annual Report

and Accounts, which were finalised during the Relevant Period.

4.132. At the January CCS PRM on 18 January 2017, the Business Unit reported the

Project Team’s estimated loss of £26.3 million loss (-5.2%) as at November 2016,

with a management adjustment of £31.2 million to help achieve a traded to date

margin of £8 million (or 1.9%). Mr Khan, who by this time was the Group FD,

attended this PRM.

4.133. The February 2017 MCS showed a “likely” exposure to traded amount of £34

million (an increase of £13 million from December 2016) and a “Red” flag status

was indicated. Mr Khan received this MCS and attended the MCRM at which it was

discussed.

4.134. The Group FD’s Report, prepared by Mr Khan, submitted to the Audit Committee

meeting on 23 February 2017 referred to the need to achieve £28.6 million

recoveries in relation to claims, which they expected to deliver through a contract

reset to achieve the forecast end of life margin of 2.0% (equivalent to £10.1

million). In their Audit Memorandum presented to the meeting, the external

auditors noted that “Carillion no longer need to achieve £19.3 million in future

cost savings, instead management is targeting an additional £28.6 million

recovery from the client through a second reset.” No reference was made to the

Project Team’s assessment of a significant loss, the scale of management

adjustments being applied, hard risks or MCS exposures, about which the Audit

Committee and external auditors remained unaware.

4.135. On 1 March 2017, Carillion announced its 2016 financial results in its March

Results Announcement. The cost, value and margin recognised for Battersea as

part of the figures released in this announcement reflected the final Position Paper

provided to the external auditors in January 2017, with a forecast end of life

margin of 1.5% (i.e. a profit of just over £8 million). The recognition of these

amounts meant that the revenue and profit/ margin figures for the Group and

Construction Services (excluding the Middle East) in the March Results

Announcement were materially misstated due to the inclusion of £28.6 million of

the contract reset in revenue and the understatement of costs, which should have

more closely reflected the Project team’s view of £534.7 million as opposed to the

figure of £516.4 million traded in Carillion’s accounts. This overstatement of

revenue and understatement of costs was not in compliance with Carillion’s

internal policies or IAS 11.

4.136. At the CCS PRMs in March and April 2017 (showing January and February 2017

figures), the Project Team reported an increased estimated loss of £34.8 million

for Battersea as of February 2017. Management adjustments of over £39 million

were applied to help bring the end of life margin back to a traded to date margin

of £8 million (1.7%). This was equivalent to an end of life margin of around £8.5

million. Mr Khan attended both of these PRMs.

4.137. The MCS in May 2017 identified a likely exposure of £33 million for Battersea. Mr

Khan was aware of the reported exposures for Battersea, as he received the May

2017 MCS and attended the MCRM for which it was prepared.

4.138. At the CCS PRM in May 2017 attended by Mr Khan, the Project Team’s reported

estimates had worsened to a forecast loss of £36.6 million, with a £41.5 million

management adjustment being applied to support a traded profit to date of £8

million as at March 2017.

4.139. On 7 June 2017, the Board held a strategy meeting attended by Mr Khan. At this

meeting, Mr Howson presented an “Overview of Key Contract Positions across the

Group”. In the presentation, Battersea was reported as having a forecast end of

life margin of £8 million (1.5%). This was expressly stated as including claims in

the forecast traded at 100% (i.e. the entirety of the claim values was recognised

in the forecast). At the CCS PRM on 22 June 2017 attended by Mr Khan, the

Project Team was estimating a £47.8 million loss, with a management adjustment

of £42.7 million helping to support a traded to date figure of £8 million as at April

2017.

4.140. Following the Enhanced Contract Review, £38 million was provided in relation to

Battersea. This amount formed part of the contract provision of £845 million

announced by Carillion on 10 July 2017.

4.141. MMH was a project to construct a new Private Finance Initiative hospital in the

West Midlands. The contract started on 11 December 2015, with an original

completion date of 20 July 2018.

4.142. The contract was tendered at a value of £296.7 million at a 5.97% margin (or

£17.7 million).

4.143. The period between Carillion bidding for MMH and financial close on 11 December

2015 was the shortest in Carillion’s history.

4.144. The progress of MMH was disrupted at an early stage by two main issues:

(1)
Problems with the design and procurement processes arising from a short

bid period; and


(2)
Adverse weather, with heavy rainfall flooding parts of the building under

construction, impacting on productivity.

4.145. As of July 2016, MMH was nine weeks behind the target construction programme

as a result of the issues referenced above.

4.146. Despite the delay to the progress of MMH, Carillion was reporting in the MPSR

Executive Summary for July 2016 that MMH had an estimated end of life margin

of 6%, equating to £17.9 million. This forecast was not supported by the Project

Team, who in the July 2016 Contract Appraisal for MMH reported a deterioration

in the end of life margin to 3.8% (£11.3 million). Notwithstanding this, the end

of life margin of £17.9 million was maintained by use of a management

adjustment of £6.6 million.

4.147. During the latter part of 2016 and the Relevant Period, there were significant and

increasing divergences between (on the one hand) the Project Team’s views on

MMH’s financial position and the financial risks internally reported by CCS to Mr

Khan and others; and (on the other hand) those reflecting budgeted forecasts

and/or reported to the Board and Audit Committee. This is illustrated in the

following graph:

Graph 3 - Each point on the graph shows the end of life (EOL) margin and/or traded to date margin
recorded in various reports pertaining to MMH as variously reported to Building, CCS, the executive
directors, the Board, the Audit Committee and/or the external auditors. The orange and blue trend
lines illustrate the increasing divergence of views across the year between the position as assessed
by the Project Team and/or in peer reviews (blue line); and the view reflected in budgeted forecasts
and/or reported to the Board, the Audit Committee and the external auditors (orange line). The
graph also shows the level of hard risk reported in hard risk schedules and the “likely” exposure to
traded amount reported in the Major Contract Summaries. The red circles show the figures of which
Mr Khan was aware at that point in time (or subsequently in the case of MPSRs), whether that was
by way of being present in meetings or receiving information directly by email.

4.148. This divergence between the internal reporting within CCS and the reporting to

the Board and the Audit Committee during the latter part of 2016 is summarised

below. The Authority has not seen any evidence indicating that Mr Khan was aware

of the facts and matters referenced at sub-paragraphs 4.131(1) to 4.131(3), but

they are set out to provide context to the financial performance of MMH in 2017.

(1) The Contract Appraisals from October to December 2016 reported a

deteriorating end of life margin for MMH, culminating in a forecast of an end

of life margin loss of £2.8 million (-0.9%) and a current traded margin loss

of £0.8 million (-0.9%) in December 2016. These margins reflected

increasing costs from £283 million to £304.8 million. Increasing levels of

management adjustment were applied, principally to the current traded

figures during this period to maintain a current traded margin of 6% to 6.6%

(approximately £6.5 million).

(2) A peer review report dated 8 November 2016 recommended an end of life

margin of £nil and that no further margin should be traded on MMH until

detailed designs had been provided and procurement issues had been

substantially advanced.

(3) The MPSR Executive Summaries to the Board and/or Audit Committee for

July and October 2016 did not reflect the Project Team’s assessments.

Instead, they consistently maintained an end of life forecast profit of around

£17.7 million (6%) for MMH, as Mr Khan was aware.

4.149. The clean” and “audit friendly” versions of the Position Paper for MMH were the

same and did not contain similar adjustments to those for RLUH and Battersea

(see paragraph 4.51 above). Mr Khan was aware of the existence of two versions

of Position Papers for MMH through an email, sent in November 2016, attaching

a document titled “Carillion Building Position Paper Summary” setting out figures

for each version of the MMH Position Paper. Both versions showed an end of life

margin of £17.7 million (6%), with costs of £280.3 million and revenue of £298

million.

4.150. The final version of the Position Paper for MMH submitted to the external auditors

for the 2016 year-end accounts was materially the same as the “clean” and “audit

friendly” versions, with a small increase in costs (to £284 million), revenue (to

£302 million) and forecast end of life margin (to £18.1 million). It was seen and

reviewed by Mr Khan. The true costs were, however, closer to £304.8 million as

reported by the Project Team (i.e. almost £21 million more than reported in the

Position Paper). This meant that the profit recognised on MMH at the 2016 year-

end was not in accordance with IAS 11 and was materially misstated.

4.151. The January MPSR was broadly consistent with the Position Paper and referred to

an end of life profit margin for MMH of 6%, which amounted to £17.7 million. By

contrast, the Commercial Report for the CCS PRM in January 2017 identified MMH

as amongst the top five projects within Building with the biggest deterioration in

end of life margin. It reported that MMH’s end of life margin had deteriorated

from 6% in December 2015 to 4.8% in October 2016 to 1% in November 2016.

Mr Khan, who by this time was the Group FD of Carillion, was aware of this

assessment as to the deterioration in MMH’s end of life margin, as he attended

4.152. The Contract Appraisal for January 2017 incorporated a “Margin Improvement

Plan” that provided for £15.5 million of claim recoveries. This had the effect of

taking the end of life forecast margin to £6.2 million (2%). This was not consistent

with the deterioration reported at the January CCS PRM above. The Contract

Appraisal in February 2017 reversed these changes and showed a forecast end of

life loss of £15.7 million (-5.2%), with a management adjustment of £12.9 million

applied to help maintain a forecast profit margin of just under £18 million

4.153. On 1 March 2017, Carillion announced its 2016 financial results in its March

Results Announcement. The cost, value and margin recognised for MMH as part

of the figures released in this announcement reflected the final Position Paper

provided to the external auditors in January 2017, with costs of £284 million and

a forecast end of life margin of 6% (assessed as a profit of just over £18 million).

This was a material misstatement of MMH’s financial position due to the level of

costs recognised, which should have more closely reflected the Project Team’s

estimate of £304.8 million. The understatement of costs was not in compliance

with Carillion’s internal policies and IAS 11. The Authority has not seen any

evidence that Mr Khan was aware of this understatement as at 1 March 2017.

4.154. The internal reporting about the financial performance of MMH continued to

diverge in the second quarter of 207. By April 2017, a Peer Review report stated

that MMH was 10 weeks behind schedule and recommended that the traded

margin should be a loss of £26.7 million, including recommended end of life costs

of £330 million. By the end of April 2017, the Project Team reported an estimated

end of life loss of £32.1 million (-10.6%). The forecast end of life costs had risen

at this stage to £334 million. A management adjustment of almost £20 million

was applied to the current traded margin for MMH to take it from a loss of £11.2

million (-10.6%) to a profit of £8.8 million (6.1%).

4.155. In April 2017, Mr Khan attended a CCS PRM at which it was reported that the

Project Team was forecasting a £15.7 million loss as at February 2017, with a

management adjustment of £12.9 million applied to help maintain a forecast profit

margin of £7.8 million (consistent with an end of life margin of over £17.7 million).

4.156. MMH first appeared on the hard risk schedule in April 2017 as a new and emerging

risk of £24 million. It also appeared for the first time in the MCS in May 2017. It

was recorded with a “likely” exposure to traded amount of £32 million and a “Red”

flag status was applied. Mr Khan was aware of the reported exposures for MMH,

as he received the May 2017 MCS and attended the MCRM for which it was

prepared. Despite this, he did not report these exposures to, or take any other

steps to ensure they were brought to the attention of, the Board or the Audit

Committee.

4.157. At the CCS PRM in May 2017, it was reported that the Project Team was estimating

a loss of £21 million, with a management adjustment of £15.7 million being

applied to support a traded profit to date of £8.4 million as at March 2017. Mr

Khan attended this PRM.

4.158. On 7 June 2017, the Board held a strategy meeting attended by Mr Khan. At this

meeting, Mr Howson presented an “Overview of Key Contract Positions across the

Group”. In the presentation, MMH was reported as having a forecast end of life

margin of £25.2 million (7%). This was expressly stated as including claims in

the forecast traded at 100% (i.e. the entirety of the claim values was recognised

in the forecast). At the CCS PRM on 22 June 2017 attended by Mr Khan, the

Project Team was estimating a £32.1 million loss and a management adjustment

of £20 million to support a traded to date figure of £8.8 million as at April 2017.

4.159. Following the Enhanced Contracts Review, £48 million was provided in relation to

MMH. This amount formed part of the contract provision of £845 million

announced by Carillion on 10 July 2017.






AWPR










4.160. AWPR was a design build finance operate contract2 for the construction of a 58km

ring road around Aberdeen. It was structured as a joint venture (“AWPR JV”) with

two other partners. The project started in January 2015. Within Carillion, it was

managed by the Infrastructure Business Unit of CCS.

4.161. The tender value for AWPR was £533 million, including costs of around £496

million and a 7% profit margin of £37 million. Carillion’s one-third share was

£177.8 million, with a margin of £12.4 million.

4.162. During 2015 and 2016, AWPR was significantly delayed by poor weather and

delays in diverting statutory utilities (such as water pipes, electricity cables, etc).

2 This type of contract is a project delivery structure in which a private sector party is awarded a contract to
design, construct, finance and operate a capital project. In consideration for performing its obligations under
the agreement, the private sector party may be paid by the government agency

4.163. By July 2016, Infrastructure was reporting estimated end of life costs of £679

million and a final margin loss of £52 million at joint venture level, after taking

into account estimated recoveries on claims for delays in diverting the statutory

utilities and insurance claims for delays caused by bad weather. Despite this,

however, an end of life profit margin of £12.4 million (7%) was reported in the

July 2016 MPSR Executive Summary.

4.164. By October 2016, Carillion had reduced the forecast end of life margin for AWPR

to a loss of £10 million. Mr Khan was aware of this movement in forecast, through

his receipt and review of MPSRs in 2016.

4.165. Despite this downwards revision, there was an increasing divergence, in the latter

part of 2016 and during the Relevant Period, between (on the one hand)

Infrastructure’s views on AWPR’s financial position as reported to Mr Khan and

others; and (on the other hand) those reflecting budgeted forecasts and/or

reported to the Board and the Audit Committee. This is illustrated in the following

Graph 4 - Each point on the graph shows the end of life (EOL) margin and/or traded to date margin
recorded in various reports pertaining to AWPR as variously reported to Infrastructure, CCS, the
executive directors, the Board, the Audit Committee and/or the external auditors. The orange and
blue trend lines illustrate the increasing divergence of views between the position as assessed by
the joint venture Project Team and Infrastructure (blue line); and the view reflecting budgeted
forecasts and/or reported to the Board, the Audit Committee and the external auditors (orange line).
The graph also shows the level of hard risk reported by the site teams in the hard risk schedules
and the “likely” exposure to traded amount reported in the Major Contract Summaries. The red
circles show the figures of which Mr Khan was aware at that point in time (or subsequently in the

case of MPSRs), whether that was by way of being present in meetings or receiving information
directly by email.

4.166. This divergence between the internal reporting by Infrastructure and CCS to Mr

Khan and the reporting to the Board and the Audit Committee during the second

half of 2016 is summarised as follows:

Infrastructure and CCS reporting to Mr Khan

(1)
In September 2016, CCS reported in a “profitability workshop” attended

by Mr Khan that there was a potential end of life loss of £30 million on

AWPR. This was compared in the presentation to a £10 million loss forecast

within RF4 at around that date.

(2)
In October 2016, CCS reported at the CCS PRM Profit Update Year End &

Budget attended by Mr Khan that AWPR was being traded at a £10 million

loss and there was no margin or write off forecasted in the budget. The

same presentation (seen by Mr Khan) stated that hard risk for AWPR

amounted to £20 million.

(3)
In the MCSs for July and October 2016, AWPR was identified as having a

“likely” exposure of £13.1m, with a “Red” flag status. This represented

44% of the total contentious amount of £30 million identified in these MCSs

as due on the project. Mr Khan received these MCSs and attended the

MCRMs at which they were discussed.

(4)
On 19 November 2016, an internal Carillion email to (amongst others) Mr

Khan addressed the cash position on AWPR and referred to an “estimated

end of life loss of £40m our share (after recovery) or £120m at a 100% JV

level”.

(5)
In the MCS for December 2016, AWPR retained its red flag status, but was

reported without any figures and with the commentary that it was “To be

discussed”. Mr Khan attended the MCRM at which this MCS was discussed.

(6)
On 16 December 2016, Infrastructure gave a presentation to the CCS PRM

with an estimated “most likely” end of life margin loss for Carillion of £78

million on AWPR, with end of life costs estimated by the joint venture

Project Team at £900 million (joint venture level) (Carillion share £300

million). Mr Khan attended this PRM.

Reporting to the Board and the Audit Committee

(7)
The MPSR Executive Summaries, Overtrade Reports, CEO and Group FD’s

reports to the Board and/or the Audit Committee during the latter part of

2016 and the Relevant Period did not reflect the above matters. As noted

above, the profit margin for AWPR in the October 2016 MPSR Executive

Summary was revised downwards to a £10 million loss and this was

subsequently maintained in the January 2017 MPSR Executive Summary

for AWPR. The Overtrade Report showed AWPR as having no revenue

traded not certified (i.e. it suggested that there was no client revenue

recognised in Carillion’s management accounts that was “at risk”). This

was incorrect because Infrastructure was relying upon claims of over £33

million even to achieve its forecast £78 million loss for AWPR. This was

also inconsistent with the two Group FD’s Reports in the second half of

2016 and during the Relevant Period which referred to AWPR relying on

claims.

(8)
On 9 November 2016, the Board was informed of “an unexpected increase

in the end out cost of the contract. The extent of the increase is not yet

fully understood and further work is being undertaken to evaluate, control

and, where possible, reduce/mitigate these costs”. AWPR was also

discussed at a Board meeting on 6 December 2016 as one of the potential

risks to achieving Carillion’s year-end profit forecast of £178 million. It

was noted in the minutes that the Board was reliant on the judgement of

the executives around AWPR as well as another project. Mr Khan attended

these Board meetings.

(9)
Whilst concerns around AWPR were raised with the Board, the end of life

estimates being reported by Infrastructure, hard risks and likely MCS

exposures were not reported to the Board or the Audit Committee. Mr Khan

was aware of the disparity between these matters and what was reported

in the MPSR Executive Summaries for July and October 2016 and the

monthly Overtrade Reports submitted to the Board and/or the Audit

Committee.

4.167. The Position Paper for AWPR at the 2016 year-end reflected the position as

reported in the October MPSR Executive Summary, with end of life costs estimated

at £652.6 million at joint venture level (Carillion’s cost being £217.5 million) and

a margin loss of £30 million (Carillion’s share being a £10 million loss). Mr Khan

reviewed this Position Paper.

4.168. In November 2016, concerns were expressed by one member of the Infrastructure

management team that he felt “compromised” by the position adopted in the

Position Paper and that there were “some real credibility challenges going

forward.” These concerns were not communicated to the Board, the Audit

Committee or external auditors.

4.169. The Position Paper submitted to the external auditors for the 2016 year-end

accounts recognised £30 million as revenue to be recovered from claims

(excluding any additional claim amounts recognised by means of negative

accruals). This included a claim for which £23.3 million of revenue was recognised

(“Claim 1”). As at the end of December 2016, the progress of Claim 1 was not

sufficient to be deemed “reasonably certain” (as per Carillion’s internal policies)

or “probable” (as per IAS 11) to be recovered. No revenue should have been

recognised in relation to it.

4.170. Infrastructure’s estimate of a £78 million loss on AWPR was repeated in a further

presentation given at the CCS PRM (attended by Mr Khan, who by this time was

the Group FD of Carillion) in January 2017. Shortly afterwards, the hard risk for

AWPR was increased to £66 million; Mr Khan became aware of this in April 2017.

The subsequent January 2017 MPSR was unchanged and continued to report an

estimated end of life loss for AWPR of £10 million.

4.171. The February 2017 MCS excluded any figures for AWPR and it was given a “Red”

flag status. Mr Khan received this MCS and attended the MCRM at which it was

discussed.

4.172. The Group FD’s Report, prepared by Mr Khan, submitted to the Audit Committee

for its meeting on 23 February 2017 referred to the need to achieve £30 million

recoveries in relation to claims and £25 million of costs savings to achieve a

revised forecast end of life margin of -2.8%, which was a loss of £10 million as

recognised in the 2016 Annual Accounts. In the Audit Memorandum presented to

the meeting, the external auditors noted that, in order to achieve the £10 million

loss, £55 million of value needed to be obtained which included claims and costs

savings. No reference was made to the Project Team’s assessment of a significant

loss, the scale of management adjustments being applied, hard risks or MCS

exposures, about which the Audit Committee and external auditors remained

unaware.

4.173. On 21 February 2017, a member of the Audit Committee emailed Mr Khan

(amongst others) to specifically question him on various points concerning AWPR

ahead of the Audit Committee meeting on 23 February 2017. Despite being aware

by this time that Infrastructure considered that the “most likely” forecast for

AWPR was a loss of £78 million and that, even on the “best case” scenario, the

forecast remained a loss of £49 million, Mr Khan did not inform the Audit

Committee member of any of the matters raised in the CCS PRM presentations,

including the forecast losses which far outstripped the figure reported to the Audit

Committee. Mr Khan’s email response to the Audit Committee member on 22

February 2017 instead described the position on AWPR as “somewhat fluid”.

4.174. On 1 March 2017, Carillion announced its 2016 financial results in its March

Results Announcement. The cost, value and margin recognised for AWPR as part

of the figures released in this announcement reflected the final Position Paper

provided to the external auditors, with a forecast end of life margin loss of £10

million, and costs of £217.5 million. The recognition of these amounts meant that

the revenue and profit / margin figures for the Group and Construction Services

(excluding the Middle East) in the March Results Announcement were materially

misstated due to an understatement of costs and the recognition of Claim 1 as

revenue in non-compliance with Carillion’s internal policies and IAS 11.

4.175. By April 2017, the estimated end of life costs had risen to £925 million (including

cost reductions), with a forecast end of life margin loss of £308.3 million (£95.7

million Carillion share). This was reported at the CCS PRM that month attended

by Mr Khan, along with traded loss of £10 million and a hard risk figure of £66

million for AWPR. The estimated loss of £95.7 million (compared to a traded loss

of £10 million) was reported again at the CCS PRMs in May and June 2017

attended by Mr Khan, as was the hard risk figure of £66 million for AWPR.

4.176. The MCS in May 2017 identified a likely exposure of £85 million for AWPR, with a

“red” flag status. However, the MPSR Executive Summary appended to it indicated

that Carillion was continuing to forecast a margin loss of £10 million only. Mr Khan

was aware of the reported exposures for AWPR, as he received the May 2017 MCS

and attended the MCRM for which it was prepared. He was also aware of the

disparity between this and what was reported in the MPSR Executive Summary as

he received and reviewed them during the Relevant Period. Notwithstanding this,

Mr Khan did not report this exposure, or take any steps to ensure it was reported,

to the Board, the Audit Committee or the external auditors.

4.177. On 7 June 2017, the Board held a strategy meeting attended by Mr Khan. At this

meeting, Mr Howson presented an “Overview of Key Contract Positions across the

Group”. In the presentation, AWPR was reported as having a forecast end of life

margin of a loss of £10 million, with over £121 million of value to be recovered

from claims. This was expressly stated as including claims in the forecast traded

at 80% (i.e. the majority of the claim values were recognised in the forecast).

4.178. Following the Enhanced Contracts Review, AWPR was written down by £86 million.

This amount formed part of the contract provision of £845 million announced by

Carillion on 10 July 2017.

5.
FAILINGS

5.1.
In light of the facts and matters above, Mr Khan was:

(1) in respect of both of the Announcements, knowingly concerned in Carillion’s

dissemination of information that gave false or misleading signals as to the

value of its shares in circumstances where it ought to have known that the

information was false or misleading (in breach of Article 15 of MAR);

(2) in respect of both of the Announcements, knowingly concerned in Carillion’s

failure to take reasonable care to ensure that its announcements were not

misleading, false or deceptive and did not omit anything likely to affect the

import of the information (in breach of LR 1.3.3R);

(3) knowingly concerned in Carillion’s failure during the Relevant Period to take

reasonable steps to establish and maintain adequate procedures, systems and

controls to enable it to comply with its obligations under the Listing Rules (in

breach of Listing Principle 1); and

(4) knowingly concerned in Carillion’s failure to act with integrity towards the

holders and potential holders of its premium listed securities (in breach of

Premium Listing Principle 2).

5.2.
These breaches are set out below and the provisions referred to are set out at

Annex A to this Notice.

Carillion’s obligations

5.3.
Article 15 of MAR states that a person shall not engage in or attempt to engage

in market manipulation.

5.4.
Article 12(1)(c) of MAR provides that market manipulation comprises

disseminating information through the media, including the internet, or by any

other means, which gives, or is likely to give, false or misleading signals as to

(amongst other things) the price of a financial instrument, where the person who

made the dissemination knew, or ought to have known, that the information was

false or misleading.

5.5.
Article 12(4) of MAR states that “Where the person referred to in this Article is a

legal person, this Article shall also apply, in accordance with national law, to the

natural persons who participate in the decision to carry out activities for the

account of the legal person concerned”.

5.6.
The “national law” for the purpose of Article 12(4) can be found in section 131AD

of the Act, which provides that “An individual participates in a decision by a body

corporate for the purposes of… Article 12(4) (market manipulation)… where: (a)

the individual was an officer of the body corporate when the decision was made;

and (2) the [Authority is] satisfied that the individual was knowingly concerned in

the decision.

The March Results Announcement

5.7.
Mr Khan, in his capacity as Group FD, was an officer of Carillion at the time of the

March Results Announcement. He had a central role in preparing and finalising

this announcement, including reviewing its content, tabling it in draft at the Audit

Committee meeting on 23 February 2017 and the Board meeting on 28 February

2017 and approving it as a member of Carillion’s Board. He signed the statement

of responsibility in respect of the March Results Announcement and the Annual

Report. This statement asserted that:

“The preliminary announcement complies with the Disclosure and Transparency

Rules (DTR) of the United Kingdom’s Financial Conduct Authority. The preliminary

announcement is the responsibility of, and has been approved by, the Directors

of Carillion plc ..[…] the financial statements contained in the 2016 Annual Report

were prepared in accordance with applicable accounting standards and gave a

true and fair view of the assets, liabilities, financial position and profit of the

Company […] the 2016 Annual Report and Accounts, taken as a whole, are fair,

balanced and understandable, and provide the information necessary for

shareholders to assess the Company’s financial position, performance, business

model and strategy”.

5.8.
The March Results Announcement and the document published alongside it

described Carillion’s performance as “in line with expectations”, with increased

revenue of £4,394.9 million and PBT of £178 million for the Group and revenue

of £1,520.2 million and operating profit of £41.3 million for “Construction Services

(excluding the Middle East)”. It described strong revenue growth in this segment

and confirmed that operating margin for this segment “remains in our target range

of 2.5 per cent to 3 per cent”. It referred to its ambition “to maintain revenue

and profit at broadly their current levels” in 2017. It went on to refer to Carillion

as a whole having a “good platform from which to develop the business in 2017”.

5.9.
The revenue and profit / margin figures for the Group and Construction Services

(excluding the Middle East) in the March Results Announcement were misstated

because they did not accurately reflect the financial performance of the Priority

Contracts. In particular, Carillion failed to recognise the costs and revenue

associated with these projects in accordance with IAS 11. The revenue and profit

/ margin figures were materially overstated as a result. This also made false and

misleading the references to Carillion’s performance being “in line with

expectations”, with strong revenue growth and operating profit targets being met

for the business segment including CCS. While it referred to “actively managing

the positions we have in challenging markets”, this statement was specifically

made in relation to markets in the Middle East and Canada and in the context of

rebalancing Carillion’s business. There was no reference to challenges in the UK

market or to the deteriorating financial performance of CCS’s construction

projects.










5.10.
The positive statements and revenue and profit / margin figures contained in the

March Results Announcement regarding Carillion’s expected financial performance

in 2017 were not justified by the facts and matters known to Carillion and Mr Khan

as at the date of the March Results Announcement, on the basis that:

(1) In the second half of 2016 the following issues had been identified and

reported within Carillion of which Mr Khan was aware:

(a)
The MCS prepared for the quarterly meeting on 5 December 2016

attended by Mr Khan identified a likely financial exposure of over

£550 million for the Group and £157.8 million for CCS. Even taking

into account any inconsistencies in the production of this report,

these figures highlighted very significant likely exposures and

excluded a further major loss-making project (AWPR), which would

(if included) have further increased the amount of the likely

exposures.

(b)
As part of its 2016 RF3 and 2017 Budget submissions, Mr Khan was

aware that CCS had reported that hard risk was forecast to amount

to £171.8 million by the end of 2016 and £149.6 million by the end

of 2017 respectively. These were amounts that were not likely to be

recovered, a significant proportion of which should have been written

off in accordance with IAS 11.

(c)
The expected financial performance of certain major contracts was

much worse than the budget and reforecasts providing the basis for

the December Announcement. Mr Khan was aware of the following

facts in this regard:

(i)
For RLUH, the Project Team had internally reported an

expected loss of between £14 million and £21 million, not the

profit of £13.6 million forecast in the July and October 2016

MPSRs. A likely financial exposure of £21 million for RLUH in

the October and December 2016 MCSs and hard risk of £10

million had been internally reported by CCS.

(ii)
For Battersea, the Project Team had internally reported an

expected loss of between £14 million and £25 million,

compared to the forecast profit of around £10 million in the

July and October 2016 MPSRs. A likely financial exposure of

£21 million in the October and December 2016 MCSs and hard

risk of £13 million had been internally reported by CCS.

(iii)
For AWPR, the Board had been informed on 9 November 2016

about an “unexpected increase in the end out cost of the

contract”. At the Board meeting on 6 December 2016

(attended by Mr Khan), AWPR was identified and discussed

as one of the potential risks to the profit forecast for the 2016

year-end. In the period between these two Board meetings,

Mr Khan (and others) had received an email referring to an

“estimated end of life loss of £40m”. This compared to a

forecast loss of £10 million in the October 2016 MPSR. The

hard risk for AWPR had been internally reported at £20

million. The MCS in December 2016 excluded any figures for

AWPR but it was still shown with a red flag status.

(d) There had been discussions around a possible deterioration in the

trading performance of the business at the Board meeting the day

before the December Announcement and the 2017 Budget had been

described as “challenging”.

(2) In addition to the matters identified above of which Mr Khan was aware, far

from improving since the second half of 2016 the financial performance of

Carillion’s construction contracts had continued to deteriorate during the

Relevant Period. The MCS for February 2017 identified significantly increased

likely exposures at Group and CCS-level. Within CCS (and to the knowledge

of Mr Khan and another person) it was being reported that:

(a)
hard risk had increased to £258.4 million by the end of December

2016;

(b)
for RLUH, the Project Team had reported a likely end of life loss of

£56.3 million against a forecast profit margin of 4.4% (i.e. a profit

of £13 million);

(c)
for Battersea, the Project Team was estimating an end of life loss of

£26.3 million against a forecast profit margin of around 2% (i.e. a

profit of around £8 million);

(d)
for AWPR, Infrastructure had internally reported a likely end of life

loss of £78 million against a forecast loss of £10 million.

(3) Two versions of Position Papers had been produced, in relation to certain

major contracts, for the purpose of the 2016 year-end, one “clean” and one

“audit friendly” (and Mr Khan knew the latter versions were being provided to

the external auditors during the Relevant Period).

5.11.
The above matters made the positive statements and revenue and profit / margin

figures in the March Results Announcement false or misleading.

5.12.
The Authority considers that Mr Khan and Carillion ought to have known that the

information in the March Results Announcement was false and/or misleading by

reason of the above matters. The Authority attributes the knowledge of Mr Khan

and another person to Carillion for its finding in this regard.

5.13.
By disseminating false or misleading information in circumstances where it ought

to have known the information was false or misleading, Carillion committed

market manipulation in breach of Article 15 of MAR. In the circumstances, and

by virtue of his knowledge and involvement in the March Results Announcement,

Mr Khan was knowingly concerned in Carillion’s breach of Article 15.

5.14.
The Authority considers that Mr Khan was aware that there was a risk that the

March Results Announcement was false or misleading due to the matters at

paragraphs 5.7 to 5.10 above. He did not respond appropriately to this risk and

failed to take it properly into account when reviewing and approving the March

Results Announcement. He also failed to inform the Board and the Audit

Committee about these matters for the purpose of their review and approval of

the March Results Announcement. This is despite the fact that he must have been

aware, particularly having regard to the nature and cumulative effect of the

information he received from CCS management highlighting increasing levels of

financial risks and exposures associated with the financial performance of CCS’s

construction contracts and the number of occasions on which such information

was reported to him, that these matters would be highly relevant to their

deliberations. The Authority considers that Mr Khan acted recklessly as a result.

The May Announcement

5.15.
The tenor of the May Announcement, on 3 May 2017, was that nothing had

materially changed since the March Results Announcement. This was reflected in

its heading (“Trading conditions unchanged”) and opening sentence (“Trading

conditions across the Group’s markets have remained largely unchanged since we

announced our 2016 full-year results”). This was not an accurate depiction of the

Group’s trading as at 3 May 2017, which was materially affected by the adverse

and deteriorating financial performance of CCS’s construction projects leading up

to that date. Mr Khan was closely involved in preparing the May Announcement.

5.16.
The facts and matters described above in relation to the March Results

Announcement indicated a significant deterioration in the financial performance

of Carillion and CCS in particular. This deterioration continued, with hard risk

within CCS reported to Mr Khan and others as increasing to £310.6 million by

March 2017. Significant concerns were raised at the Board meeting attended by

Mr Khan on 3 May 2017 about the deterioration in financial performance of

Carillion’s major projects. These concerns were consistent with the continued

deterioration of CCS’s major projects, including (to the knowledge of Mr Khan and

another person):

(1)
RLUH, where in April 2017 the Project Team had estimated a £58.8 million

loss and a management adjustment of £64.9 million was applied to help

maintain the forecast profit margin of over £13 million;

(2)
Battersea, where in April 2017 the Project Team had forecast a £34.8

million loss and a management adjustment of just under £40 million was

being applied to help maintain the forecast profit margin of over £8 million;

(3)
MMH, where in April 2017 the Project Team had forecast a £15.7 million

loss, with a management adjustment of £12.9 million applied to help

maintain a forecast profit margin of £17.7 million; and

(4)
AWPR, where in April 2017 Infrastructure had internally reported the most

likely end of life loss as being over £95 million, compared to the forecast

£10 million loss.

5.17.
The comment in the May Announcement about challenging contract positions did

not adequately address these matters. It was expressly linked to the similar

statement made in the March Results Announcement, which was specific to the

Middle East and Canada. This impression was reinforced by use of the words

“particularly in our international markets”. It therefore did not convey significant

problems within Carillion’s UK construction business (i.e. CCS).

5.18.
The Authority considers that Mr Khan and Carillion ought to have known that the

information in the May Announcement was false or misleading by reason of the

above matters. The Authority attributes the knowledge of Mr Khan and another

person to Carillion for its finding in this regard.

5.19.
By disseminating false or misleading information in circumstances where it ought

to have known the information was false or misleading, Carillion committed

market manipulation in breach of Article 15 of MAR. In the circumstances, and

by virtue of his knowledge and involvement in the May Announcement, Mr Khan

was knowingly concerned in Carillion’s breach of Article 15.

5.20.
The Authority considers that Mr Khan was aware that there was a risk that the

May Announcement was false or misleading due to the matters at paragraphs 5.7

to 5.10 and 5.15 to 5.17 above. He did not respond appropriately to this risk and

failed to take it properly into account when reviewing and approving the May

Announcement. He also failed to inform the Board and the Audit Committee about

these matters for the purpose of their review and approval of the May

Announcement. This is despite the fact that he must have been aware,

particularly having regard to the nature and cumulative effect of the information

he received from CCS management highlighting increasing levels of financial risks

and exposures associated with the financial performance of CCS’s construction

contracts and the number of occasions on which such information was reported

to him, that these matters would be highly relevant to their deliberations. The

Authority considers that Mr Khan acted recklessly as a result.

Carillion’s obligations and knowing concern

5.21.
Listing Rule 1.3.3R requires an issuer to take reasonable care to ensure that any

information it notifies to a RIS or makes available through the Authority is not

misleading, false or deceptive and does not omit anything likely to affect the

import of the information. As a listed company, Carillion was required to comply

with LR 1.3.3R.

5.22.
Section 91(2) of the Act provides that “If, in the case of a contravention [by an

issuer] … the [Authority] considers that [another person] who was at the material

time a director of [the issuer] was knowingly concerned in the contravention, it

may impose upon him a penalty of such amount as it considers appropriate.”

Carillion’s breaches and Mr Khan’s knowing concern

5.23.
By failing to take account of the matters at paragraphs 5.7 to 5.10 and 5.15 to

5.17 above in its announcements, and by failing to ensure that the matters at

paragraphs 5.26 to 5.38 below in relation to Listing Principle 1 were properly

addressed, Carillion failed to take reasonable care to ensure that information it

notified to a RIS was not misleading, false or deceptive and did not omit anything

likely to affect the import of the information, in breach of LR 1.3.3R.

5.24.
By virtue of his knowledge and involvement in the Announcements as detailed

above, and by failing to ensure that the matters at paragraphs 5.26 to 5.38 below

in relation to Listing Principle 1 were properly addressed during the Relevant

Period, Mr Khan was knowingly concerned in Carillion’s breach of LR 1.3.3R with

regard to the Announcements.

5.25.
For the reasons given in paragraphs 5.14 and 5.20 above, and in paragraph 5.40

below, the Authority considers that Mr Khan acted recklessly in respect of his

knowing concern in Carillion’s breach of LR 1.3.3R.

Carillion’s obligations and knowing concern

5.26.
Listing Principle 1 requires a listed company to take reasonable steps to establish

and maintain adequate procedures, systems and controls to enable it to comply

with its obligations. These obligations include compliance with the Listing Rules,

in particular the timely and accurate disclosure of information to the market, as

set out in LR 7.2.2G and LR 7.2.3G.

5.27.
As a listed company, Carillion was required to comply with Listing Principle 1.

Section 91(2) of the Act provides that “If, in the case of a contravention [by an

issuer] … the [Authority] considers that [another person] who was at the material

time a director of [the issuer] was knowingly concerned in the contravention, it

may impose upon him a penalty of such amount as it considers appropriate.”

Carillion’s procedures, systems & controls

5.28.
Throughout the Relevant Period, Mr Khan was the Group FD of Carillion and thus

the director with primary responsibility for ensuring financial information

disseminated to the market was accurate and not misleading. He was also

responsible for ensuring that Carillion had adequate procedures, systems and

controls in place relating to financial reporting. Shortcomings in Carillion’s

procedures, systems and controls around the financial reporting of its construction

contracts meant that Carillion was unable to comply with its obligations under the

Listing Rules.

5.29.
The Authority considers that a listed company should have in place procedures,

systems and controls that provide clear, consistent and transparent reporting

throughout the company. This should include procedures, systems and controls

that:

(1)
ensure the financial performance of construction contracts is assessed in

accordance with applicable accounting standards, including IAS 11;

(2)
identify and internally report on material financial risks associated with such

assessments;

(3)
produce consistent management and financial information about such

assessments and any associated risks, as well as ensuring that any

inconsistencies are identified and resolved with appropriate enquiry and

follow-up actions as required; and

(4)
provide sufficient information to the Board and Audit Committee to enable

them properly to consider the financial performance of construction projects

and assess material risks associated with their financial reporting.

5.30.
Carillion’s procedures, systems and controls did not meet these standards. Mr

Khan was aware of and involved in the following matters that, when taken

together, made Carillion’s procedures, systems and controls inadequate during

the Relevant Period:

(1)
Significant pressure placed on CCS to meet targets;

(2)
Lack of proper records around contract accounting judgements;

(3)
Inconsistent management and financial information; and

(4)
Failure to inform the Board and the Audit Committee about the significant

financial risks being reported by CCS.

Pressure on CCS to meet targets

5.31.
Significant pressure was placed on CCS to meet very challenging budgeted and

reforecast targets through the budgeting and reforecasting process headed,

during the Relevant Period, by Carillion’s two executive directors, Mr Khan and Mr

Howson. The targets were maintained even as CCS reported deteriorating

financial performance in certain major projects and increasing hard risks and MCS

exposures during the Relevant Period. This greatly increased the risk that

contract accounting judgements under IAS 11 would be applied too aggressively

by CCS in order to meet those targets and would not comply with IAS 11 as a

result. In those circumstances, the control framework around CCS’s contract

accounting judgements needed to be especially transparent and robust to

minimise the risk of non-compliance. It was not, significantly increasing the risk

that market announcements in relation to Carillion’s financial performance would

not be accurate.

5.32.
During the Relevant Period, despite knowing the pressure placed on CCS to meet

targets maintained by him, and despite his knowledge of the Group’s accounting

policies and the requirements of IAS 11, Mr Khan did not take any meaningful

steps to satisfy himself that contract accounting judgements were being applied

appropriately or to ensure that the control framework around those judgements

was sufficiently transparent and robust to ensure compliance with IAS 11.

Lack of proper records

5.33.
The contract accounting judgements being applied were not properly documented,

which meant there was no clear record of the assessments being made, approved

or reviewed. This contributed to a lack of rigour around contract accounting

judgements and their approval and review. Mr Khan was aware of the following

inadequacies in this regard:

(1)
The PRM process was a key forum at which the financial performance of

projects was discussed and reviewed at different levels within CCS, often in

the context of Carillion’s budgeting and reforecasting process. Mr Khan

72

attended the CCS PRMs both in the latter part of 2016 and during the

Relevant Period, but there were no minutes taken of PRM discussions and

no record of any detailed review or changes to contract account judgements

made or the reasons for them.

(2)
Position Papers reflected the contract accounting judgements made, but

absent any other records, did not provide adequate explanation or support

for them. Having received and reviewed the Position Papers for the purpose

of the 2016 year-end accounts, Mr Khan was aware of this omission during

the Relevant Period. Even putting to one side his knowledge that “audit

friendly” Position Papers were being produced, in relation to certain major

contracts, for the purpose of the 2016 year-end accounts, the judgements

applied in the Position Papers were often inconsistent with other

management information being reported by those responsible for making

contract judgements, as reflected in MCS exposures, hard risk and Project

Team’s forecasts reported in CCS PRMs. Mr Khan did not take any steps to

resolve these inconsistencies, or to ensure that they were explained or

otherwise addressed in the Position Papers.

Inconsistent management information on financial performance

5.34.
The management information produced and reported by CCS to (amongst others)

Mr Khan highlighted large and increasing risks associated with the reported

financial performance of CCS’s construction projects both during and prior to the

Relevant Period. This information was inconsistent with other reports that

contained much more optimistic assessments of the financial performance of

those projects. In particular, Mr Khan was aware of the following matters during

the Relevant Period:

(3)
The increasingly large risks associated with the contract accounting

judgements being applied to CCS’s construction projects and underpinning

their financial performance were identified to Mr Khan by means of CCS

reporting internally on hard risk. This was seen by those making the

judgements as an increasingly important means of highlighting those risks

to enable appropriate action to be taken, for example by means of write-

offs, provisions or changes to budgets and reforecasts. Despite this, no

meaningful action was taken by Mr Khan, during the Relevant Period, in

response.

(4)
The MCSs highlighted likely financial exposures associated with Carillion’s

contracts, including CCS’s construction projects. To Mr Khan’s knowledge,

no guidance was given to those preparing the MCS and the figures reported

in it were inconsistent. It was nonetheless another means by which Business

Divisions (including CCS) reported large exposures that significantly

increased in the latter part of 2016 and during the Relevant Period. The

increasingly large exposures reported in it were not addressed by Mr Khan

during the Relevant Period.

(5)
There were large and increasing divergences in the latter part of 2016 and

during the Relevant Period between the Project Teams’ assessments of the

financial performance of the Priority Contracts and the much more optimistic

forecasts contained in budgets and reforecasts. These divergences were

reported to (amongst others) Mr Khan by means of CCS PRMs or in some

cases by email. Mr Khan did not make proper enquiries as to the reasons

behind these divergences or seek to resolve them during the Relevant

Period.

(6)
The above information provided to Mr Khan was inconsistent with the figures

reported to the Board and the Audit Committee in the MPSR Executive

Summaries and Overtrade Reports. It was also inconsistent with the

financial position of CCS’s construction projects, as contained in Position

Papers and typically reflected in budgets and reforecasts. Mr Khan failed to

undertake any enquiries to understand why these inconsistencies had arisen

and failed to take steps to resolve them.

Failure to inform the Board and the Audit Committee

5.35.
The Board and the Audit Committee were not made aware of the significant and

increasing financial risks during the Relevant Period that were being highlighted

by CCS to (amongst others) Mr Khan, as described in paragraph 5.34 above. This

meant they were hampered in providing effective oversight of CCS’s financial

performance and the contract accounting judgements being applied to its major

projects. This was especially important for the Audit Committee since it was

responsible for reviewing and challenging whether Carillion had “followed

appropriate accounting standards and made appropriate estimates and

judgements [in its financial statements], taking into account the views of the

external auditor”.

5.36.
Instead, as Mr Khan was aware, reports to the Board and discussions at Board

meetings tended to focus on operational issues associated with individual projects,

not their financial impact. Financial reporting to the Board in relation to financial

risks associated with Carillion’s construction contracts mainly consisted of the

MPSR Executive Summaries and Overtrade Reports. They did not reflect the

financial risks identified and highlighted by CCS by means of, for example, hard

risks, MCS exposures, CCS PRMs or otherwise.

5.37.
The information provided to the Audit Committee in order to enable them to

assess contract accounting judgements was contained in or appended to the

Group FD’s Report (prepared by Mr Khan in February 2017) and the external

auditors’ half and year-end memorandums. These documents only reported the

outcome of the judgements, not their basis or the risks associated with them. As

a result, and in the absence of information about hard risks, MCS exposures and

the adverse assessments made by Project Teams, they did not provide the Audit

Committee with information which was important in order effectively to assess

whether or not the judgements were being applied appropriately.

5.38.
In light of the above matters, the Authority considers that Carillion failed to take

reasonable steps to ensure that it had adequate procedures, systems and controls

during the Relevant Period to comply with its obligations under the Listing Rules.

Carillion breached Listing Principle 1 as a result.

5.39.
By virtue of his knowledge of the matters at paragraphs 5.30 to 5.37 above, and

his failure to ensure that they were properly addressed during the Relevant Period,

Mr Khan was knowingly concerned in Carillion’s breach of Listing Principle 1.

5.40.
Further, the Authority considers that Mr Khan was aware in light of the matters

at paragraphs 5.28 to 5.37 above that there was a risk that Carillion did not have

adequate procedures, systems and controls to enable it to comply with its

obligations under the Listing Rules. He did not respond appropriately to this risk

and failed to take any steps to address these matters during the Relevant Period.

The Authority considers that Mr Khan acted recklessly as a result.

5.41.
Premium Listing Principle 2 requires a listed company to act with integrity towards

the holders and potential holders of its premium listed securities.

5.42.
As a listed company, Carillion was required to comply with Premium Listing

Principle 2 in relation to its premium listed securities during the Relevant Period.

5.43.
As explained in paragraphs 5.14, 5.20, 5.25 and 5.40 above, Mr Khan acted

recklessly in relation to the facts and matters described above during the Relevant

Period. The Authority attributes Mr Khan’s state of mind to Carillion in this regard.

5.44.
For these reasons, Carillion breached Premium Listing Principle 2 by failing to act

with integrity towards its holders and potential holders of its premium listed

shares and Mr Khan was knowingly concerned in Carillion’s breach.

6.
SANCTION

Financial penalty

6.1.
The Authority’s policy for imposing a financial penalty is set out in Chapter 6 of

DEPP. In respect of conduct occurring on or after 6 March 2010, the Authority

applies a five-step framework to determine the appropriate level of financial

penalty. DEPP 6.5B and DEPP 6.5C set out the details of the five-step framework

that applies in respect of financial penalties imposed on individuals in non-market

abuse cases and market abuse cases respectively.

Step 1: disgorgement

6.2.
Pursuant to DEPP 6.5B.1G and DEPP 6.5C.1G, at Step 1 the Authority seeks to

deprive an individual of the financial benefit derived directly from the breach

where it is practicable to quantify this.

6.3.
The Authority has not identified any financial benefit that Mr Khan derived directly

from the breach.

6.4.
Step 1 is therefore £0.

76

Step 2: the seriousness of the breach

6.5.
Pursuant to DEPP 6.5B.2G and DEPP 6.5C.2G, at Step 2 the Authority determines

a figure that reflects the seriousness of the breach. That figure is based on a

percentage of the individual’s relevant income and, for market abuse cases, the

greater of that amount, a multiple of the profit or loss avoided by the individual

for his own benefit or £100,000 for cases the Authority has assessed as

seriousness level 4 or 5. The individual’s relevant income is the gross amount of

all benefits received by the individual from the employment in connection with

which the breach occurred, and for the period of the breach. In circumstances in

which the breach lasted for less than 12 months, the relevant income is that

earned by the individual during the 12 months preceding the end of the breach.

6.6.
The period of Mr Khan’s breach was from 1 January 2017 until 10 July 2017, so

Mr Khan’s relevant income is that which he earned between 11 July 2016 and 10

July 2017. The Authority considers the relevant income for this period to be

£514,750. The Authority considers that Mr Khan did not make a direct profit or

avoid a loss as a result of his knowing concern in Carillion’s breaches of Article 15

of MAR, and therefore DEPP 6.5C.2G(b) does not apply.

6.7.
In deciding on the percentage of the relevant income that forms the basis of the

Step 2 figure, the Authority considers the seriousness of the breach and chooses

a percentage between 0% and 40%. This range is divided into five fixed levels

which represent, on a sliding scale, the seriousness of the breach; the more

serious the breach, the higher the level. For penalties imposed on individuals in

non-market abuse and market abuse cases there are the following five levels:

Level 1 – 0%

Level 2 – 10%

Level 3 – 20%

Level 4 – 30%

Level 5 – 40%

Level of seriousness

6.8.
In assessing the seriousness level, the Authority takes into account various factors

which reflect the impact and nature of the breach.





Impact of the breach

6.9.
DEPP 6.5B2G(8) and DEPP 6.5C.2G(11) set out factors relating to the impact of a

breach. The Authority considers the following factors to be relevant to Mr Khan’s

knowing concern in Carillion’s breaches:

(1) Mr Khan did not personally financially benefit from the breaches;

(2) the breaches had a seriously adverse effect on the orderliness of, or

confidence in, the market. The public nature of Carillion’s business, the size

and scope of its reporting failures and its subsequent liquidation have together

undermined public confidence in the financial reporting regime, including the

listing regime; and

(3) the breaches meant that Carillion’s shares were significantly overpriced for a

considerable period. Following the announcement of 7 July 2017, which

included the £375 million construction services provisions, Carillion’s share

price fell 39% by the end of the day.

Nature of the breach

6.10.
DEPP 6.5B.2G(9) and DEPP 6.5C.2G(12) set out factors relating to the nature of

a breach. Of these, the Authority considers the following factors to be relevant to

Mr Khan’s knowing concern in Carillion’s breaches:

(1) The breaches revealed serious and systemic weaknesses in Carillion’s

procedures and/or in the management systems or internal controls relating to

Carillion’s business.

(2) The breaches of LR 1.3.3R and Listing Principle 1, in respect of which Mr Khan

was knowingly concerned, were for a sustained period and resulted in the

misleading Announcements.

(3) Mr Khan held a senior position within Carillion as its Group FD.

(4) As Group FD Mr Khan held a position of trust for investors, creditors and

employees of Carillion, all of whom were entitled to rely on the announcements

being made by Carillion.

(5) Mr Khan was an experienced accountant in the construction services sector.

6.11.
DEPP 6.5B.2G(12) and DEPP 6.5C.2G(15) set out factors which are likely to be

considered ‘level 4 factors’ or ‘level 5 factors’. The Authority considers the

following factors to be relevant to the breaches:


(1) The breaches caused a significant loss or risk of loss to individual consumers,

investors or other market users.

(2) The breaches resulted in an effect on the orderliness of, or confidence in,

markets.

(3) Mr Khan breached a position of trust.

(4) The breaches were committed recklessly.

6.12.
DEPP 6.5B.2G(13) and DEPP 6.5C.2G(16) list factors likely to be considered ‘level

1, 2 or 3 factors’. Of these, the Authority considers the following factor to be

relevant to the breaches:

(1) No profits were made or losses avoided by Carillion because of the breaches,

either directly or indirectly.

6.13.
Taking all of these factors into account, the Authority considers the seriousness

of the breaches to be level 4 and so the Step 2 figure is 30% of £514,750, which

equates to £154,425.

Step 3: mitigating and aggravating factors

6.14.
Pursuant to DEPP 6.5B.3G and DEPP 6.5C.3G, at Step 3 the Authority may

increase or decrease the amount of the financial penalty arrived at after Step 2,

but not including any amount to be disgorged as set out in Step 1, to take into

account factors which aggravate or mitigate the breach.

6.15.
The Authority considers that there are no aggravating or mitigating factors.

6.16.
Step 3 is therefore £154,425.

Step 4: adjustment for deterrence

6.17.
Pursuant to DEPP 6.5B.4G and 6.5.C.4G, if the Authority considers the figure

arrived at after Step 3 is insufficient to deter the individual who committed the

breach, or others, from committing further or similar breaches, then the Authority

may increase the penalty.

6.18.
The Authority considers that the Step 3 figure of £154,425 represents a sufficient

deterrent to Mr Khan and others, and so has not increased the penalty at Step 4.

6.19.
Step 4 is therefore £154,425.

Step 5: Settlement discount

6.20.
Pursuant to DEPP 6.5B.5G and DEPP 6.5C.5G, if the Authority and the individual

on whom a penalty is to be imposed agree the amount of the financial penalty

and other terms, DEPP 6.7 provides that the amount of the financial penalty which

might otherwise have been payable will be reduced to reflect the stage at which

the Authority and the individual reached agreement. The settlement discount

does not apply to the disgorgement of any benefit calculated at Step 1.

6.21.
No settlement discount applies.

6.22.
Step 5 is therefore £154,400 (rounded down to the nearest £100 in accordance

with the Authority’s usual practice).

6.23.
The Authority therefore has decided to impose a financial penalty of £154,400 on

Mr Khan.

7.
REPRESENTATIONS

7.1.
Annex B contains a brief summary of the key representations made by Mr Khan

and how they have been dealt with. In making the decision which gave rise to

the obligation to give this Notice, the Authority has taken into account all of the

representations made by Mr Khan, whether or not set out in Annex B.

8.
PROCEDURAL MATTERS

8.1.
This Notice is given to Mr Khan under sections 127 and 92 of the Act and in

accordance with section 388 of the Act.

8.2.
The following statutory rights are important.

Decision maker


8.3.
The decision which gave rise to the obligation to give this Notice was made by the

RDC. The RDC is a committee of the Authority which takes certain decisions on

behalf of the Authority. The members of the RDC are separate to the Authority

staff involved in conducting investigations and recommending action against firms

and individuals. Further information about the RDC can be found on the

Authority’s website:

The Tribunal


8.4.
Mr Khan has the right to refer the matter to which this Notice relates to the

Tribunal. Under paragraph 2(2) of Schedule 3 of the Tribunal Procedure (Upper

Tribunal) Rules 2008, Mr Khan has 28 days from the date on which this Notice is

given to him to refer the matter to the Tribunal. A reference to the Tribunal is

made by way of a signed reference notice (Form FTC3) filed with a copy of this

Notice. The Tribunal’s contact details are: The Upper Tribunal, Tax and Chancery

9730; email: fs@hmcts.gsi.gov.uk). Further information on the Tribunal,

including guidance and the relevant forms to complete, can be found on the HM

Courts and Tribunal Service website:

8.5.
A copy of the reference notice (Form FTC3) must also be sent to the Authority at

the same time as filing a reference with the Tribunal. It should be sent to Stephen

Robinson at the Financial Conduct Authority, 12 Endeavour Square, London E20

1JN.

8.6.
Once any such referral is determined by the Tribunal and subject to that

determination, or if the matter has not been referred to the Tribunal, the Authority

will issue a final notice about the implementation of that decision.

Access to evidence


8.7.
Section 394 of the Act applies to this Notice.

8.8.
The person to whom this Notice is given has the right to access:

(1)
the material upon which the Authority has relied in deciding to give this

Notice; and

(2)
the secondary material which, in the opinion of the Authority, might

undermine that decision.

Confidentiality and publicity


8.9.
This Notice may contain confidential information and should not be disclosed to a

third party (except for the purpose of obtaining advice on its contents). In

accordance with section 391 of the Act, a person to whom this Notice is given or

copied may not publish the Notice or any details concerning it unless the Authority

has published the Notice or those details.

8.10.
However, the Authority must publish such information about the matter to which

a decision notice or final notice relates as it considers appropriate. The person to

whom this Notice is given or copied should therefore be aware that the facts and

matters contained in this Notice may be made public.

Authority contact


8.11.
For more information concerning this matter generally, contact Stephen Robinson

at
the
Authority
(direct
line:
020
7066
1388/email:

Stephen.Robinson@fca.org.uk).

Chair, Regulatory Decisions Committee

ANNEX A

RELEVANT STATUTORY AND REGULATORY PROVISIONS

The statutory and regulatory provisions set out below are the versions that were

in force in the period between 1 January 2017 and 10 July 2017 (i.e. the Relevant

1.
STATUTORY PROVISIONS

1.1.
The Authority’s general duties established in section 1B of the Act include the

strategic objective of ensuring that relevant markets function well and the

operational objectives of protecting and enhancing the integrity of the UK financial

system and securing an appropriate degree of protection for consumers.

Power to Impose Penalties for Market Abuse

1.2.
Section 123 of the Act sets out the Authority’s power to impose penalties in cases

of market abuse. It states as follows:

“(1) The [Authority] may exercise its power under subsection (2) if it is satisfied

that—




(a) a person has contravened […] Article 15 (prohibition of market

manipulation) of the market abuse regulation;

(2) The [Authority’s] power under this subsection is a power to impose a

penalty of

such amount as it considers appropriate on the person.”

Individual Liability for Legal Persons under MAR

1.3.
Section 131AD of the Act sets out the provisions for individual liability in respect

of legal persons under Article 12 of MAR. It states as follows:

“(1) An individual participates in a decision by a body corporate for the purposes

of […] Article 12.4 (market manipulation) of the market abuse regulation

where—

(a) the individual was an officer of the body corporate when the decision was

made; and

(b) the [Authority is] satisfied that the individual was knowingly concerned in

the decision.

(2) In this section “officer”, in relation to a body corporate, means–

(a) a director, member of the committee of management, chief executive,

manager, secretary or other similar officer of the body, or a person purporting

to act in any such capacity; or

(b) an individual who is a controller of the body.”

Listing Rules Statutory Provision

Penalties for Breach of Listing Rules

1.4.
Section 91 of the Act states as follows:

“(1) If the [Authority] considers that-

(a) an issuer of listed securities, or

(b) an applicant for listing,

has contravened any provision of listing rules, it may impose on him a penalty of

such amount as it considers appropriate.

(2) If, in the case of a contravention by a person referred to in subsection (1)

[(“P”)], the [Authority] considers that another person who was at the material

time a director of P was knowingly concerned in the contravention, it may impose

upon him a penalty of such amount as it considers appropriate.”

2.
REGULATORY PROVISIONS

Market Abuse Regulation (EU No. 596/2014)

Market Manipulation








2.1.
Article 12(1)(c) of MAR states that market manipulation will comprise of the

following activities

“disseminating information through the media, including the internet, or by any

other means, which gives, or is likely to give, false or misleading signals as to the

supply of, demand for, or price of, a financial instrument, a related spot

commodity contract or an auctioned product based on emission allowances or

secures, or is likely to secure, the price of one or several financial instruments, a

related spot commodity contract or an auctioned product based on emission

allowances at an abnormal or artificial level, including the dissemination of

rumours, where the person who made the dissemination knew, or ought to have

known, that the information was false or misleading”.

2.2.
Article 12(4) of MAR states as follows:

“Where the person referred to in this Article is a legal person, this Article shall

also apply, in accordance with national law, to the natural persons who participate

in the decision to carry out activities for the account of the legal person

concerned.”

2.3.
Article 15 of MAR states as follows:

“A person shall not engage in or attempt to engage in market manipulation.”

2.4.
Listing Rule 1.3.3R states as follows:

“An issuer must take reasonable care to ensure that any information it notifies to

a RIS or makes available through the FCA is not misleading, false or deceptive

and does not omit anything likely to affect the import of the information”.

2.5.
Listing Principle 1 states as follows:

“A listed company must take reasonable steps to establish and maintain

adequate procedures, systems and controls to enable it to comply with its

obligations.”

Guidance on the Listing Principles






2.6.
LR 7.2.2 G states as follows:

“Listing Principle 1 is intended to ensure that listed companies have adequate

procedures, systems and controls to enable them to comply with their

obligations under the listing rules, disclosure requirements, transparency rules

and corporate governance rules. In particular, the [Authority] considers that

listed companies should place particular emphasis on ensuring that they have

adequate procedures, systems and controls in relation to, where applicable:

(2) the timely and accurate disclosure of information to the market.”

2.7.
LR 7.2.3 G states as follows:

“Timely and accurate disclosure of information to the market is a key obligation

of listed companies. For the purposes of Listing Principle 1, a listed company

should have adequate systems and controls to be able to:

(1) ensure that it can properly identify information which requires disclosure

under the listing rules, disclosure requirements, transparency rules or corporate

governance rules in a timely manner; and

(2) ensure that any information identified under (1) is properly considered by

the directors and that such a consideration encompasses whether the

information should be disclosed.“

2.8.
Premium Listing Principle 2 states as follows:





“A listed company must act with integrity towards the holders and potential

holders of its premium listed securities.”

Decision Procedures and Penalties Manual

2.9.
In determining the level of financial penalty to be paid in respect of conduct

occurring on or after 6 March 2010 the Authority has had regard to the provisions

of DEPP, particularly DEPP 6.5B and DEPP 6.5C.

ANNEX B

REPRESENTATIONS

1. A summary of the key representations made by Mr Khan, and the Authority’s

conclusions in respect of them (in bold), is set out below.

Knowing concern – the legal position

2. In order to be knowingly concerned in a contravention, the person must have been

actually involved in the contravention and must have knowledge of the facts on which
the contravention depends. Mr Khan cannot have been knowingly concerned without
knowing the facts constituting the breach. The key legal question in respect of each
alleged breach is therefore what are the facts that make the acts complained about a
contravention?

3. Mr Khan’s position on knowing concern is supported by the recent decision by the Court

of Appeal in Ferreira3. The Court of Appeal rejected the policy reasons which the
Authority has raised in support of its construction of knowing concern and made it clear
that there is intended to be a difference in the test for liability for a primary infringer
and a secondary party.

4. Even if it was established that Mr Khan was reckless as to certain matters, that does

not establish that he had knowledge of those matters.

5. The Authority agrees that, in order for Mr Khan to be knowingly concerned in

a contravention by Carillion of Article 15 of MAR, LR 1.3.3R, Listing Principle
1 and/or Premium Listing Principle 2, he must be shown: (i) to have been
actually involved in the contravention; and (ii) to have had “knowledge of the
facts upon which the contravention depends”4. As explained below in respect
of each specific contravention, the Authority disagrees with Mr Khan’s view
as to what (ii) requires the Authority to establish.

6. The Court of Appeal’s decision in Ferreira is not inconsistent with the

Authority’s analysis of the knowingly concerned test. In Ferreira, the Court
of Appeal was considering a contravention which included a disapplication
provision (i.e. a provision identifying the circumstances in which the
contravention does not apply) and a factual element relating to that
disapplication provision, but no equivalent disapplication provision or factual
element exists in relation to the contraventions in this case. As Ferreira was
concerned with knowledge of a purely factual question, it does not support
Mr Khan’s interpretation of the knowingly concerned test, which effectively
requires him to have had knowledge of legal conclusions or evaluations, as
opposed to primary facts. The Court of Appeal’s analysis of the relevant policy
arguments arose in the context of a primary offence of strict liability;
fundamentally different considerations apply in this case, where the primary
contraventions are fault-based. As the primary contraventions in this case are
established by reference to the knowledge of Mr Khan and others who are
alleged to be knowingly concerned in the breach, in the Authority’s view there
is no rationale for including a requirement of additional knowledge on the part
of the secondary party.

7. The Authority agrees that the test for recklessness is different to the test for

knowing concern. For the reasons given in this Notice, the Authority
considers that Mr Khan both was knowingly concerned in Carillion’s
contraventions and acted recklessly.

3 FCA v Ferreira [2022] EWCA Civ 397
4 SIB v Scandex Capital Management A/S [1998] 1 WLR 712

8. For Mr Khan to be knowingly concerned in a breach by Carillion of Article 15 of MAR, it

must be established that the Announcements were false or misleading and that he
knew both that the Announcements were false or misleading and that Carillion ought
to have known this. However, it is not even alleged that he knew that the
Announcements were false or misleading and so the allegation that he was knowingly
concerned must fail.

9. It cannot be right for the test just to be that Mr Khan ought to have known that the

Announcements were, or were likely to be, false and misleading, as then mere
inadvertence would satisfy the knowing concern test. While a company might be liable
for market abuse if it ought to have known that an announcement was false, the same
is not true of an individual involved with the company’s decision to make the
announcement. As is clear from the Court of Appeal’s decision in Ferreira, it is not
illogical for the test to be such that the primary actor is liable but the secondary actor
is not.

10. Mr Khan’s interpretation of the “knowingly concerned” test would not undermine the

objectives of the MAR regime as this was the test chosen by Parliament for accessory
liability for market abuse. In addition, this interpretation should not affect directors’
behaviour as they cannot escape liability by turning a blind eye to warning signs.

11. Mr Khan honestly believed that the information contained in the Announcements was

correct. He did not know that they were false or that Carillion ought to have known
that they were false. Therefore, he cannot be knowingly concerned in a breach of
Article 15 of MAR by Carillion. This conclusion is consistent with Australian case law.

12. Further, Mr Khan cannot be knowingly concerned if he did not know facts attributed to

Carillion as a result of the knowledge of other persons (for example, Mr Howson or Mr
Adam).

13. The Authority does not agree with Mr Khan’s view as to what is required in

order for him to have had knowledge of the facts upon which Carillion’s
contravention of Article 15 of MAR depends. Instead, the Authority considers
that, in respect of each Announcement, it is necessary to show that Mr Khan
knew: (i) the information contained in the Announcement; and (ii) sufficient
facts to support the conclusion that Carillion ought to have known that the
Announcement was false or misleading.

14. If Mr Khan’s submission was correct, the Authority would effectively have to

show that he acted deliberately. The Authority considers that is not the
correct test. Carillion’s breach of Article 15 of MAR is based on the attribution
of knowledge from Mr Khan (and another person) to Carillion, as a result of
which Carillion ought to have known that the Announcements were false or
misleading. There is no need to prove actual knowledge that the
Announcement in question was false or misleading for the purpose of
Carillion’s primary contravention. Likewise, there is no need to establish that
Mr Khan had such knowledge in order for him to be knowingly concerned.

15. The proposition that information is “false or misleading” is not a primary fact,

but rather a legal conclusion reached by applying the relevant legal test to
the facts. Instead, the facts relied upon in respect of Carillion’s
contraventions of Article 15 of MAR are facts concerned with the
Announcements and, by contrast, what was said and known within Carillion
as to the matters addressed in the Announcements, for example, the financial
risks and exposures reported as high risks and likely major contract
exposures.

16. Further, Mr Khan’s approach to the knowingly concerned test would

fundamentally undermine the market abuse regime and its objectives, as the

implication would be that a director could remain passive (which, unlike
turning a blind eye, does not require a deliberate act) in response to warning
signs, so as to avoid acquiring actual knowledge that an announcement
contained
false
or
misleading
information,
and
thereby
insulate

himself/herself from individual liability. In addition, if a director did not have
the personal responsibility to take steps to satisfy himself/herself that
information is true and not misleading, the obligation on a company to take
reasonable care in respect of its announcements would be significantly
undermined. In the Authority’s view, it is not unfair for a director of a listed
issuer to be held to be knowingly concerned in circumstances where it is their
own conduct which gives rise or contributes to the primary breach.

17. The Authority considers that Australian case law does not support Mr Khan’s

position because there are judgments in Australian cases which are both
consistent and inconsistent with his position, and the fact that there are two
differing lines of authority does not appear to have been resolved. Further,
the Authority considers that little weight should be placed on Australian case
law, as it is directed to the specific statutory provisions which were in issue
in those cases.

18. The Authority considers that Mr Khan did not need to know of every fact on

which Carillion’s contravention is based; rather, he needed to know of
sufficient facts to support the conclusion that Carillion ought to have known
that the Announcements were false or misleading. The Authority has reached
the view that Mr Khan’s knowledge is sufficient to conclude that Carillion was
in breach of Article 15 of MAR, even where Carillion was also in breach as a
result of facts known by others.

19. To be knowingly concerned in a breach of LR 1.3.3R, it would need to be established

that Mr Khan knew that Carillion had failed to ensure that the information notified to a
RIS or made available through the Authority was not misleading, false or deceptive or
omitted things likely to affect the import of the information, and that he knew that
Carilion had failed to take reasonable care to ensure this, or at least that he knew that
the procedures that were in place had inadequacies. However, it is not alleged that he
had such knowledge. The contention that Mr Khan was aware of the risks that the
Announcements were false or misleading and that Carillion did not have adequate
procedures does not support an allegation that he was knowingly concerned in
Carillion’s alleged breach of LR 1.3.3R.

20. The Authority does not agree with Mr Khan’s view as to what is required in

order for him to have had knowledge of the facts upon which Carillion’s
contravention of LR 1.3.3R depends. Similar to Article 15 of MAR, the matters
which Mr Khan submits he requires knowledge of in order to be knowingly
concerned are legal conclusions, rather than primary facts.

21. Instead, the Authority considers that Mr Khan was knowingly concerned in

Carillion’s contravention of LR 1.3.3R because he knew the following facts: (i)
the information contained in the Announcements; (ii) information (such as
that contained in MCSs on potential exposures in the Priority Contracts) which
indicated that the statements in the Announcements regarding Carillion’s
financial position did not reflect the true financial performance of CCS’s
construction contracts; and (iii) the (inadequate) steps taken by Carillion
during the Relevant Period to ensure that the Announcements were not false
or misleading, which included knowledge that the Board and the Audit
Committee were not provided with the above information (which in turn
hampered their ability to ensure that the Announcements were accurate).

22. The Authority considers that, for the reasons set out in this Notice, the

Announcements clearly were misleading, but does not consider it is necessary
to show that Mr Khan knew this or that the steps taken by Carillion to ensure
that the Announcements were not misleading were inadequate. As with
Article 15 of MAR, if the Authority was required to establish such knowledge,
it would effectively be required to prove that he acted deliberately, which the
Authority considers goes too far and is not the correct test.

23. Similarly to LR 1.3.3R, to be knowingly concerned in a breach of Listing Principle 1, it

would need to be established that Mr Khan knew that Carillion had failed to take
reasonable steps to establish and maintain adequate procedures, systems and
controls, but this is not alleged. Awareness of the risk that Carillion did not have
adequate procedures, systems and controls is not sufficient for Mr Khan to be
knowingly concerned.

24. The Authority does not agree with Mr Khan’s view as to what is required in

order for him to have had knowledge of the facts upon which Carillion’s
contravention of Listing Principle 1 depends. Instead, the Authority considers
it is only necessary to establish that Mr Khan knew of the (inadequate) steps
taken by Carillion during the Relevant Period to seek to establish and maintain
adequate procedures, systems and controls to enable it to comply with its
obligations. The Authority does not consider it is necessary for it to establish
that Mr Khan knew that those steps fell short of what reasonable care
required; that is a legal conclusion and not a primary fact.

25. Mr Khan does not accept that he was reckless or acted with a lack of integrity, and he

did not know the alleged risks or that Carillion acted with a lack of integrity, so he
cannot have been knowingly concerned in a breach of Premium Listing Principle 2 by
Carillion.

26. Carillion’s contravention of Premium Listing Principle 2 is based on attributing

the knowledge of Mr Khan (and another person) to Carillion. The facts which
constitute Carillion’s contravention are therefore that Mr Khan (and another
person) appreciated the risk of Carillion committing breaches of Article 15 of
MAR, LR 1.3.3R and Listing Principle 1 and did not respond appropriately to
that risk. In order to be knowingly concerned in Carillion’s contravention, the
Authority must show that Mr Khan had the knowledge that gives rise to
Carillion’s integrity breach, i.e. that he knew of the risk of breach, and that he
did not respond appropriately to that risk. The Authority therefore does not
agree that it is necessary to show that Mr Khan knew that Carillion acted with
a lack of integrity.

27. As explained below, the Authority considers that Mr Khan acted recklessly and

with a lack of integrity, and was aware of the said risks.

Recklessness and lack of integrity

28. There is no basis for a finding that Mr Khan was reckless as he was not aware of, and

did not ignore, the alleged risks that the Announcements were false or misleading, that
reasonable care had not been taken to ensure that the Announcements were not false
or misleading, and that Carillion had inadequate procedures, systems and controls to
enable it to comply with its obligations under the Listing Rules. In particular, he was
not aware of a risk that: (i) overly aggressive accounting judgements were being made
at the level of Carillion’s Business Divisions in order to maintain CCS’s reported
revenues and profitability; or (ii) accounting judgements were being made at the level
of the Business Divisions which did not reflect the divisional managers’ best
understanding of the true financial position of the Projects or the financial risks

associated with them. Mr Khan honestly believed that accounting judgements were
being made properly by those at the level of the Business Divisions.

29. Although Mr Khan accepts he had knowledge of many of the documents and emails

referred to in this Notice, he did not know that they evidenced a risk that the
Announcements were false or misleading or that Carillion had failed to comply with its
regulatory obligations.

30. Even if it was concluded that Mr Khan’s conduct was reckless, it was at the very lowest

end of the broad spectrum of conduct that can be described as reckless and did not
indicate a lack of integrity on the part of Carillion. A finding of a lack of integrity does
not automatically follow from a finding that an individual acted recklessly. The Tribunal
has stated5 that in its view integrity “connotes moral soundness, rectitude and steady
adherence to an ethical code. A person lacks integrity if unable to appreciate the
distinction between what is honest or dishonest by ordinary standards.” Whilst in an
appropriate case reckless conduct can indicate a lack of integrity, in this case the
alleged reckless conduct – i.e. that he failed to identify that a number of emails and
documents that he saw contained ‘red flags’ - does not suggest any moral failing, lack
of rectitude or breach of an ethical code and so it does not indicate a lack of integrity.

31. As Group FD, Mr Khan had a central role in preparing and finalising the

Announcements and approving them as a Board member. He did so in the
knowledge of information about Carillion’s financial position that was
inconsistent with the positive statements made in the Announcements. Mr
Khan was also aware that this information had not been brought to the
attention of the Board or the Audit Committee and had not been taken into
account by the Board in approving the Announcements. As a result, the
Authority considers that Mr Khan was aware of the said risks.

32. The Authority considers that Mr Khan acted recklessly by failing to respond

appropriately to the risks relating to the Announcements, by failing to take
them into account when reviewing and approving the Announcements and by
failing to ensure the Board and the Audit Committee were informed of the
warning signs of which he was aware. Further, the Authority considers that
Mr Khan acted recklessly by not responding appropriately to the risk that
Carillion’s procedures, systems and controls were inadequate and by failing
to take any steps to address that risk.

33. The Authority considers that Mr Khan’s reckless conduct demonstrates an

objective failing of ethics or morals on his part and thereby a lack of integrity.
In respect of the breach of Article 15 of MAR, recklessness on the part of a
finance director of a listed company as to the accuracy of its market
announcements is, objectively, an ethical or moral failing. Shareholders and
potential shareholders rely on the accuracy of market announcements. For Mr
Khan to sign off on positive market announcements despite clear warning
signs about significant deterioration in the performance of the company is a
serious form of recklessness. Further, in respect of the breaches of LR 1.1.3R
and Listing Principle 1, Mr Khan’s failings included a failure to ensure that the
Board and the Audit Committee were informed of the warning signs of which
he was aware, in circumstances where he knew that these warning signs were
inconsistent with other management and financial information provided to
the Board and the Audit Committee. The Authority considers that Mr Khan’s
recklessness in this regard amounts to a lack of integrity.

Evidence and likelihood of wrongdoing

34. Given the seriousness of the allegations, and their inherent improbabilities, there must

be strong evidence of wrongdoing in order to find that Mr Khan committed the alleged

5 Geoffrey Alan Hoodless and Sean Michael Blackwell v Financial Services Authority [2003]

misconduct. However, there is no such strong evidence. The Authority relies on only a
small number of documents, and there is no direct evidence supporting its case.

35. At the heart of the Authority’s case is a scheme (not involving Mr Khan) to pass

misleading ‘formal’ financial reports to the Group, in a context where the same people
were, at the same time, passing other documents to the Group that were intended to
give a ‘fairer’ assessment of the financial position. The alleged scheme apparently
involved numerous individuals and was widely known, yet was not discovered by the
Board, the Audit Committee or the external auditors. Such a scheme is inherently
improbable and it is equally improbable that Mr Khan would acquiesce to such
wrongdoing.

36. The Authority considers that there is compelling evidence in support of its

conclusion that Mr Khan was knowingly involved in Carillion’s contraventions
and acted recklessly. As well as the hard risk and MCS figures, Mr Khan
received information by a variety of means and from a number of highly
experienced
individuals
within
CCS,
showing
large
and
increasing

divergences between the assessments of financial performance by the project
and/or management teams within CCS and the financial performance as
reflected in Carillion’s budgeted forecasts.

37. The Authority disagrees with Mr Khan’s characterisation of its case. Instead,

at the centre of its case are the numerous warning signs of which Mr Khan
was aware, which highlighted the financial risks and exposures associated
with contract accounting judgements made within CCS. Mr Khan did not take
appropriate steps to address these warning signs or satisfy himself that
contract accounting judgements were being applied appropriately, and did
not inform the Board or the Audit Committee of the warning signs, despite the
fact that he must have been aware, particularly having regard to the nature
and cumulative effect of the warning signs, that they would be highly relevant
to their deliberations.

Mr Khan’s motivation

38. From the outset of becoming Group FD on 1 January 2017, Mr Khan was prepared to

break bad news to his colleagues and to the market. For example, on 22 January 2017
he recommended that Carillion suspend or significantly reduce the 2016 full year
dividend. A write-down in the 2016 financial statements would have attracted less
negative coverage than the cancellation of the dividend. It makes no sense for Mr
Khan to have chosen to report some serious matters to the Board, yet not report
concerns about financial reporting. His actual behaviour was therefore inconsistent
with that of a person who would knowingly, or recklessly, mislead the market and/or
allow Carillion to operate procedures and processes which he knew or suspected to be
inadequate.

39. Mr Khan was not responsible as Group FD for the financial statements for 2016, so he

had no motivation to conceal any inaccuracy or suspicion of inaccuracy. It is also not
plausible that he would take on the role of Group FD knowing or suspecting that the
financial statements were about to be misstated.

40. As set out above, the Authority considers that Mr Khan was aware of the risks

that the Announcements were misleading, that reasonable care had not been
taken to ensure that the Announcements were not false or misleading, and
that Carillion did not have adequate procedures, systems and controls to
enable it to comply with its obligations under the Listing Rules. Mr Khan did
not respond appropriately to these risks. He did not take them into account
in reviewing the Announcements and did not take any steps to address the
risk regarding Carillion’s procedures, systems and controls. The Authority
does not consider that Mr Khan’s submissions regarding his actual behaviour
and motivation undermine these conclusions. The Authority’s conclusions are

based on assessing the information known to Mr Khan at the relevant times
and the actions he took. As a result, the Authority does not need to reach,
nor has it reached, a conclusion with respect to Mr Khan’s motives, in order
to be satisfied that the evidence demonstrates that he acted recklessly.

Mr Khan’s role as the Group FD

41. The Priority Contracts were important contracts, but CCS was just one of several

Business Divisions, and Mr Khan received a great deal of information from all of them
and he also had a number of responsibilities. A Group FD cannot reasonably be
expected to question every piece of information that passes across their desk. As the
Group FD in a group of the size and complexity of Carillion, Mr Khan had to be
extremely discerning in relation to the information to which he paid particularly close
regard and the information on which he relied. That made it all the more important
that any issues and their potential significance were brought unambiguously to his
attention, but that did not happen in relation to the alleged ‘red flags’.

42. The information flowing up to the Group from the Business Units and Business Divisions

started off as raw data generated on site and judgements made on that data by the
Business Units and Business Divisions. The data and judgements flowed through a
number of layers of management and needed to be reduced to a manageable size so
that they could be digested by, among others, the Group’s Finance team, including Mr
Khan. The executives at Group level, including Mr Khan, expected key commercial
issues to be brought to their attention by the Business Divisions.

43. As Group FD, Mr Khan had primary responsibility for ensuring that the

financial results of the Group were accurately reported. This responsibility
required him, at the very least, to take all reasonable steps to satisfy himself,
in the light of the information that he received, that the financial performance
of Carillion’s construction contracts was being accurately reported in
compliance with financial reporting requirements, including IAS 11.

44. Mr Khan was aware that significant financial risks and exposures were being

reported internally by CCS, as he received papers showing hard risk figures,
MCSs and reports from project and/or management teams of large and
increasing divergences in financial performance in relation to the Priority
Contracts. Given the nature and cumulative effect of the warning signs, it
was incumbent upon Mr Khan to address them and to ensure that they were
brought to the attention of the Board and the Audit Committee. Given his
personal responsibilities, as the Group FD, in relation to: (i) the financial
affairs of Carillion as a whole, including its financial reporting to the market;
(ii) the preparation of the Announcements (in which he played an integral
role); (iii) his approval of the Announcements as a director of the Board; (iv)
the adequacy of Carillion’s systems and controls with respect to financial
reporting; (v) the overall adequacy of Carillion’s provisions; and (vi)
providing the Audit Committee with assurance that the level of provisions
made for risks in connection with Carillion’s major contracts was appropriate,
Mr Khan should have paid regard to all the information he received, not just
that contained in the reports prepared for the Board. Further, the evidence
shows that Mr Khan had a detailed level of involvement in the information
which flowed up to him, which is inconsistent with Mr Khan’s assertion that
the ‘red flags’ were not brought to his attention.

IAS 11 and contract accounting judgements

45. When Mr Khan became Group FD, he reasonably relied upon the processes and controls

of the business, and on the professional judgement of senior professionals in
management levels beneath him, as ensuring sufficient and appropriate rigour was
applied to judgements and estimates made in respect of the various contract positions.
Mr Khan reasonably believed that appropriate rigour was being applied. Management

teams at the Business Unit and Business Division levels were suitably qualified and
experienced and were best placed to make judgements around IAS 11, which can only
be made by professionals on the ground with day-to-day experience and knowledge of
the particular contract. They are not judgements that can be taken by accountants at
Group level, including the Group FD, with no direct involvement in the contracts.

46. The nature of IAS 11 judgements and their significance to Carillion’s business

meant that it was particularly important for Mr Kahn to take all reasonable
steps to address the warning signs of which he was aware. The application
of IAS 11 means that the reporting of a construction contract’s financial
performance is heavily influenced by judgements as to the estimated end of
life revenue and costs of a contract and the likely recoverability of value
associated with claims and variations. This made the proper application of
IAS 11 in particular of fundamental importance to Carillion. As Group FD, Mr
Khan had primary responsibility for ensuring that the financial results for the
Group were accurately reported, so he could not simply rely on the processes
in place and the judgements of others, notwithstanding their qualifications
and experience, in particular given his awareness of the warning signs.

Carillion’s control framework

47. It has not been demonstrated that Carillion failed to take reasonable steps to establish

and maintain adequate procedures, systems and controls. Carillion had a clear, well-
established reporting system. If individuals chose to misuse the reporting system, it
does not follow that the system was inadequate.

48. Mr Khan was not aware and did not suspect that Carillion had not taken reasonable

steps to establish and maintain adequate procedures, systems and controls to enable
it to comply with its obligations. Even if there was confusion within CCS as to the
status and meaning of the information contained within the hard risk schedules or the
MCSs, such confusion did not impair Carillion’s systems and controls, because those
systems and controls around financial reporting were not based on those documents.

49. Whilst Mr Khan was, from an overarching perspective, responsible for the procedures,

systems and controls within Carillion as they related to accounting, it is not reasonable
to: (i) conclude that he was aware that there was a lack of documentation supporting
the decisions that were being made around management adjustments; or (ii) criticise
him for not changing or undertaking a wholesale review of the systems and controls
around financial reporting, given the short period he was Group FD and the number of
pressing challenges on which he was necessarily and reasonably focused during his
tenure. Nevertheless, as Group FD, Mr Khan did seek to make improvements to how
information flowed within Carillion, as is indicated by an email from a Board member
in February 2017 congratulating him on the steps he had taken to improve the contents
of his Board reports.

50. The Authority considers that there were serious failings in Carillion’s

procedures, systems and controls during the Relevant Period. These are
evident from the fact that Carillion’s systems and controls did not prevent or
address the inconsistency between (i) the management information relating
to hard risks, MCSs and certain major projects reported by CCS, which
highlighted large and increasing risks associated with the financial
performance of CCS’s construction projects, and (ii) the information
contained in other reports, such as Overtrade Reports and MPSRs, that
contained much more optimistic assessments of the financial performance of
those projects, as reported to the Board and the Audit Committee. Further,
the fact that the Board and the Audit Committee were not made aware of the
more pessimistic assessments in the management information referred to
above also demonstrates that Carillion’s procedures, systems and controls
were inadequate.

51. Mr Khan was aware of these inconsistencies and also that they were not being

reported to the Board and the Audit Committee. Given the scale of the
financial risks reported in the hard risk schedules and MCSs, it was not
reasonable for Carillion’s systems and controls to ignore these important
sources of information. As this information was not being taken into account
in the papers going to the Board and to the Audit Committee, Mr Khan must
have been aware that there was a risk that Carillion did not have adequate
procedures, systems and controls to enable it to comply with its obligations
under the Listing Rules.

52. Mr Khan had been Group FC prior to becoming Group FD, and as Group FC had

also been aware of the inconsistencies and that they were not being reported
to the Board or to the Audit Committee. Therefore, upon becoming Group FD,
he must have been aware of the risk that Carillion’s systems and controls
were inadequate, and so the Authority does not consider that he can
reasonably rely upon his short tenure as Group FD to excuse his failure to take
steps to address this risk. The email from the Board member in February 2017
congratulating him on the improvements to the contents of the Board reports
does not demonstrate that Mr Khan took adequate steps to address the
failings in Carillion’s systems and controls, given that the Board reports still
did not reflect the financial risks identified and highlighted by CCS to Mr Khan
and others. Instead, the Authority considers that Mr Khan failed to undertake
any enquiries to understand why the inconsistencies had arisen and failed to
take any steps to resolve them.

Pressure to meet targets

53. Mr Khan’s personal experience from being a finance director at the Business Division

level was that finance directors were not put under any pressure to submit
inappropriate numbers in order to meet targets.

54. There is no substantive evidence that pressure was applied to CCS during the latter

part of 2016 or when Mr Khan was Group FD to meet challenging financial targets in
order to maintain CCS’s traded figures. Target-setting is not an excuse for submitting
inaccurate financial reports.

55. Mr Khan does not consider that Carillion’s systems and controls were inadequate to

counter the risk that, as a result of the alleged pressure which was exerted, overly
aggressive accounting judgements would be applied in order to maintain Carillion’s
financial performance.

56. Notwithstanding Mr Khan’s submission regarding his personal experience, the

Authority considers that the documentary and interview evidence shows that
there was significant pressure on CCS to meet very challenging financial
targets. During the Relevant Period, Mr Khan (and others) maintained these
targets despite being aware of concerns raised at CCS level regarding the
achievability of targets set and that CCS was reporting deteriorating financial
performance in respect of the Priority Contracts and increasing hard risks and
MCS exposures. This greatly increased the risk that contract accounting
judgements under IAS 11 would be applied overly aggressively by CCS in
order to meet those targets and would not comply with IAS 11 as a result.

57. In these circumstances, the Authority considers that the control framework

around CCS’s contract accounting judgements needed to be sufficiently
transparent and robust to ensure compliance with IAS 11. However, it was
not, and during the Relevant Period the level of management adjustments
applied in order to maintain CCS’s traded margins continued to grow. Mr Khan
was aware of this but did not take appropriate steps to satisfy himself that
contract accounting judgements were being applied appropriately or to

ensure that the control framework around those judgements was sufficiently
transparent and robust.

58. The most critical documents for the purposes of financial reporting were the Position

Papers, which were intended to contain a fair assessment of the financial position of
each of Carillion’s contracts and were assumed to be based on the divisional contract
appraisals. Position Papers contained the Business Division’s best judgements as to
value for the purposes of IAS 11 and thus the numbers which would form the basis of
Carillion’s financial reporting. The divisional Contract Appraisal documents were not
accessible to Group Finance or Mr Khan. Mr Khan sought to understand what the data
he received meant for cash management, budgeting and financial reporting purposes,
but he was not in a position to amend the Position Papers and did not do so.

59. The preparation of the Position Papers was an iterative process, with discussions taking

place within the Business Divisions and Business Units. To the extent that different
iterations of those Position Papers were presented to Group management, Mr Khan
only relied on the final versions.

60. As Mr Khan was aware, the Position Papers did not refer to the financial risks

associated with hard risks, MCS exposures or divergences between the latest
budget or reforecast and the assessment of the Project Team, Business Unit
or Business Division. It was therefore not reasonable for Mr Khan to place
such reliance upon the Position Papers for the purposes of financial reporting.
He also failed to ensure that the inconsistencies were explained or otherwise
addressed in the Position Papers.

61. In addition, Mr Khan was aware that the external auditors, who received the

Position Papers, were being given information regarding CCS’s financial
position which did not correspond with CCS’s actual assessments. In these
circumstances, Mr Khan should have taken steps to ensure that the external
auditors were informed of these additional matters.

Management adjustments

62. There is no evidence to suggest that Mr Khan was aware of any improper use of

management adjustments or that he personally directed any individual to use
management adjustments to deliver certain positions which in reality were
unattainable. Mr Khan relied upon the judgement of those on the ground and the
robustness of Carillion’s reporting systems, and so did not doubt the appropriateness
of any management adjustments. He necessarily relied on senior management in the
Business Divisions to ensure that the management adjustments they were applying
were appropriate and in accordance with Carillion’s written policies. He was never told
and never suspected that the contract appraisals adopted by the Business Units and
Business Divisions did not reflect their best judgements.

63. Mr Khan was not responsible for commercial issues arising on the Priority Contracts

and he could not be responsible for determining the appropriate level of provision for
them. The management adjustments applied to the Priority Contracts were
determined at the level of the appropriate Business Unit and Business Divisions and
those adjustments were reflected in the management accounts of those Business
Divisions. The Group Finance team and Mr Khan were in no position to re-write the
Business Divisions’ accounts.

64. If the Project Teams were using management adjustments to plug the difference

between the true values and the budget, regardless of their true judgement as to sums
likely to be recovered, they were acting contrary to Carillion’s profit recognition policy.

65. During the Relevant Period, Mr Khan attended a series of CCS PRMs which

showed that the Project Teams’ end of life forecasts for the Priority Contracts
continued to deteriorate, and that the scale of management adjustments

continued to increase, such that the traded figures for the projects remained
unaltered. Despite being aware of: the respective Project Team’s estimates
for each of the Priority Contracts (and the continued deterioration of those
estimates); the large and increasing divergence from the traded figures for
each project; and the correspondingly large and increasing management
adjustments applied to each project, such that the traded figures remained
unaltered, Mr Khan made no enquiries to satisfy himself that such large and
increasing management adjustments were warranted. The importance of
doing so is clear from the fact that the management adjustments in respect
of the Priority Contracts amounted (in each of the CCS PRMs between March
and June 2017) to over half of the underlying PBT for the Group for the full
year 2016, as reported to the market in the March Results Announcement.

66. It was not appropriate for Mr Khan simply to rely on Carillion’s policies and

senior management to ensure that the management adjustments were
appropriate given: (i) the information he was provided on hard risks, MCS
exposures, the deteriorating performance of the Priority Contracts and the
high and increasing level of management adjustments being applied; and (ii)
his own responsibilities for Carillion’s financial affairs, including the overall
adequacy of Carillion’s provisions.

67. Given the volume of detailed information in each PRM pack, which was usually around

100 pages long, it generally was not practicable for Mr Khan to review them in detail.

68. PRMs were a reporting forum for the Business Divisions and it was not intended that

accounting judgements would be made in that forum, nor were they. The main focus
of the PRMs was on core operational and commercial concerns. The meetings did not
address detailed contract-specific information to allow anyone to form fresh views as
to the contract accounting estimates. The ultimate decisions on margins and traded
positions were taken by management within the Business Divisions.

69. Within CCS alone there were more than 300 contracts in this period. Whilst the bigger

contracts, including the Priority Contracts, would at least be discussed briefly at each
monthly PRM, their gross value was less than 5% of Carillion’s total revenue of £5
billion, so their importance and the focus Mr Khan could properly apply to them should
not be overstated.

70. Notwithstanding the size of the PRM pack, the information regarding the

financial position was presented in such a way that Mr Khan would have been
aware that the views within CCS contrasted with that being reported in papers
to the Board and the Audit Committee. For example, in respect of the CCS
PRM in January 2017, the PRM pack included a ‘dashboard’ summary which
showed: (i) for RLUH, a Project Team estimate of a £39 million loss (-13%),
with a management adjustment of £53.9 million applied to help achieve a
traded-to-date margin of 4.7% (£11.7 million); (ii) for Battersea, a Project
Team estimate of a £26.3 million loss (-5.2%), with a management
adjustment of £31.2 million to help achieve a traded-to-date margin of 1.9%
(£8 million); (iii) an increase in Building management adjustments from
around £75 million in January 2016 to just under £150 million in July 2016 to
just under £200 million in November 2016; and (iv) an increase in
Infrastructure management adjustments of just over £45 million in January
2016 to just under £60 million at July 2016 and around £45 million in
December 2016.

71. The PRM process was an important forum at which the financial performance

of projects was discussed and reviewed at different levels with CCS, often in
the context of Carillion’s budgeting and reforecasting process. These
discussions included discussions of claims, variations and costs on different

projects, and the challenges or opportunities associated with them, including
their recovery strategy. The CCS PRMs included reporting of hard risk and
MCS figures, and also showed that the Project Teams considered that the
financial performance of the Priority Contracts was deteriorating and that
large and increasing management adjustments were being applied. In these
circumstances, Mr Khan could not reasonably fail to take into account such
information when considering whether contract accounting judgements were
being applied appropriately.

72. Although the value of the Priority Contracts might have been relatively small

in comparison to Carillion’s total revenue, the scale of the potential losses for
them, which consistently ran into the tens of millions of pounds for each
project, was extremely significant relative to the underlying PBT for the whole
Group of £178 million for the full year 2016. Mr Khan was aware of this and
so must have been aware of their importance and the need for him to give
them appropriate attention.

Red flags

73. Mr Khan did not understand the hard risk figures or MCSs produced by CCS to be ‘red

flags’ which suggested that the financial performance of the projects reported by CCS
through Carillion’s “core” accounting system was incorrect.

74. Mr Khan’s understanding is that the hard risk figures and the MCSs were intended to

address commercial issues outside the framework of statutory financial reporting and
involving assessments made on a different basis. The fact that they formed part of
Carillion’s processes does not mean that they formed part of Carillion’s financial
reporting processes. Whatever the intentions of those preparing the documents, Mr
Khan did not understand or suspect that the values in the documents were intended
to reflect more accurate judgements than those in the contract appraisals. If this had
been suggested to him, he would have investigated the matter because it would have
been a clear breach of Carillion’s control framework.

75. Mr Khan understood that the hard risk and MCS reports had commercial uses, but also

that they did not displace information that was provided to Group management through
the “core” reporting channels. He should not be held responsible if individuals at
Business Unit and Business Division level chose not to report the correct numbers
through the proper financial reporting channels, but instead chose to record the correct
numbers through a parallel informal channel which formed no part of the financial
reporting framework.

76. Other alleged ‘red flags’ – consisting of a few isolated emails predating his time as

Group FD and some PRM packs – did not give Mr Khan cause for concern about either
the financial reporting or Carillion’s controls. None of the emails sought to inform Mr
Khan that the figures reported in the Position Papers were wrong and reasonably he
would not have paid close attention to them.

77. The Authority, in particular, relies on three emails. The first of these emails was sent

in September 2016 by the RLUH Project Team to Mr Howson (and others), which Mr
Howson forwarded to Mr Khan (and others). The spreadsheet attached to this email
appears to predict an end of life margin loss of £50 million on the project, reduced to
a £14 million loss by realistic recoveries and reduced further to an £8 million loss by
other potential benefits. This email is evidence of those with responsibility for
assessing, approving and reviewing accounting judgements considering the RLUH
contract carefully. It is also unrealistic to expect the Group FD of a major listed
company to pay careful attention to each and every attachment to the thousands of
emails he received.

78. The second email was sent to Mr Khan (and others) on 19 November 2016, regarding

the cash position on AWPR. There were considerable uncertainties at the time in
relation to confidence around the cost to complete AWPR and the value of claims.

Although the position for AWPR would have been discussed at the December 2016
PRM, Mr Khan was Group FC at the time and would have had only limited involvement
in those discussions.

79. The third email is an internal email between senior CCS individuals dated 24 November

2016 which was forwarded to Mr Khan the same day, which attached Building Position
Papers and a summary of adjustments made to make them “audit friendly”. The
preparation of the Position Papers was an iterative process and Mr Khan only relied on
the final versions. As he did not have a detailed knowledge of the contracts and was
not involved in making management adjustments, it is not surprising that he would
not have paid close attention to the attachments. Further, he cannot recall reading the
substance of the forwarded email and a reasonable reading of it is that the Position
Papers had been prepared and they were ready to send to the external auditors.

80. In the light of the alleged ‘red flags’, there was no reason why Mr Khan should have

reported differently to the Board and the Audit Committee and included in his reporting
details of the hard risk numbers and the MCS.

81. It was not appropriate for Mr Khan to proceed on the basis that, because the

hard risk and MCS figures were not part of what he describes as the “core”
reporting channels, they should not have been taken into account in
Carillion’s financial reporting processes. The magnitude of the risks revealed
by these figures meant it was imperative that Mr Khan, given his
responsibilities as Group FD, take reasonable steps to satisfy himself that
Carillion’s financial reporting was accurate. However, he failed to do so.

82. Besides hard risk and MCS reporting, Mr Khan was informed by a variety of

means of the large and increasing divergences between: (i) the assessments
of financial performance by the project and/or management teams within
CCS; and (ii) the financial performance as reflected in Carillion’s budgeted
forecasts. The Authority considers that this information amounts to an
independent source of significant warning signs from a number of highly
experienced senior employees within CCS. For example, Mr Khan was
informed of: (i) very large disparities between the end of life estimates
provided by experienced CCS personnel and the much more positive
assessments reflected in Carillion’s budgeted forecasts; (ii) assessments
from within CCS which explicitly set out itemised recovery plans running to
tens of millions of pounds, and which concluded that the contracts in question
were severely loss-making even after the application of those proposed
recoveries; (iii) assessments not just from Project Team level but also from
CCS management and director level, which could not be considered just raw
site team estimates; and (iv) CCS’s provision of “audit friendly” Position
Papers to the external auditors, which did not reflect CCS’s best estimate of
the position of the contracts. Mr Khan was aware of these warning signs by
the time he became Group FD, and they should have given him cause for
concern about Carillion’s financial reporting and controls, in particular when
considered cumulatively with the hard risk and MCS figures. As a result, he
should have taken appropriate steps to address these warning signs
(including the hard risk and MCS figures) and to ensure that they were
brought to the attention of the Board and the Audit Committee, but he failed
to do so.

83. Mr Khan was sent the September 2016 email with a specific invitation to

discuss, so the Authority considers that he was aware of the information
contained in it. The email was sent by an experienced contractor on the RLUH
project and needed to be taken seriously. His assessment was supported by
an itemised loss of proposed recoveries amounting to £42 million, but even
taking these into account the RLUH Project was still considered to be loss-
making, which would then have triggered the immediate recognition of the

full extent of the expected loss. Mr Khan therefore had good reason to
consider whether any further alteration to his estimate by way of
management adjustment was in fact justified or at least to take steps to
understand the basis for such an adjustment. However, he did not take such
steps or inform the Board or the Audit Committee of this assessment.

84. The email of 19 November 2016 was sent by a senior CCS individual. It

referred to an end of life loss for Carillion in respect of AWPR of £40 million.
Although the email made clear that costs to complete on the AWPR project
were uncertain, this does not assist Mr Khan’s position, given that the
outcome of the revised cost-to-complete exercise was actually an even worse
end of life assessment, namely the £78 million projected loss mentioned in
the report presented at the CCS PRM on 16 December 2016 which Mr Khan
attended. Mr Khan was therefore aware of this projected loss, when he
became Group FD, but he failed to take it properly into account when
reviewing and approving the March Results Announcement and failed to bring
it to the attention of the Board and the Audit Committee.

85. The email dated 24 November 2016 forwarded to Mr Khan stated: “Please find

attached the latest Building position papers together with a summary of the
adjustments we have had to make to make them audit friendly.” The fact that
changes had to be made to make the Position Papers “audit friendly” should
have been a clear cause for concern for Mr Khan. The spreadsheet attached
to the email states, for each project that it addresses, the ‘original’ and
‘adjusted’ end of life forecasts and calculates the movement between those
figures. For RLUH, the ‘original’ end of life forecast was adjusted from a
£38.67 million loss to a £14.05 million profit, being a movement of £52.72
million, and for Battersea, the ‘original’ end of life forecast was adjusted from
a £28.56 million loss to a £8.03 million profit, being a movement of £33.59
million. The spreadsheet also includes a table showing the corresponding
adjustments made to the ‘recovery strategy’ for the projects. It was therefore
brought to Mr Khan’s attention that the external auditors were being
presented with an ‘adjusted’ view which did not correspond with CCS’s actual
assessment of the position. Mr Khan was specifically sent this email to review
the Position Papers, yet he did not take action to satisfy himself that the
adjustments were warranted, including once he became Group FD. Given the
magnitude of the adjustments, it was not appropriate for him simply to rely
on the adjusted figures.

Hard risk

86. CCS was the only Business Division which reported hard risk when Mr Khan was Group

FD, but this did not happen in a structured or regular manner across CCS Business
Units. Mr Khan did not understand hard risk to refer to values that needed to be
written off. Amounts described as hard risk were not described as irrecoverable, but
rather as items to which a degree of risk attached or which required additional focus
in terms of recovery strategies. CCS management did not make any requests to Group
Finance for a write-off or for provision to be made against these balances.

87. Hard risk was used by different individuals, in different contexts, for different purposes,

and there was a lack of common understanding as to its meaning and how it should be
reported. This supports Mr Khan’s submission that he acted reasonably in relying on
the formal reporting of positions through, for example, the Position Papers.

88. Hard risk schedules were submitted as part of the budgeting and forecasting process,

and were not submitted as part of any monthly, quarterly, half year or year-end
reporting. CCS only updated the hard risk schedules as part of the target setting
process and included a summary table in the PRM packs. Mr Khan did not review the
hard risk schedules and was not asked to do so. He also understood that the external
auditors had been presented with hard risk schedules in the past and had indicated

that they were neither helpful nor reliable. Hard risk was not highlighted or discussed
in the managing director’s or commercial director’s summaries in the PRM pack, to
which the external auditors had access, and hard risk was not raised or routinely
discussed during PRMs.

89. Hard risk relief was a relief that was granted as part of the budgeting process; it played

no part in the numbers reported in the Position Papers, which ultimately formed part
of the external financial reporting. The numbers set out in the Position Papers reflected
the actual reported numbers, determined solely by CCS (as was appropriate), reflecting
an assessment of contracts at a point in time by the Business Division and Business
Units.

90. Mr Khan has no recollection of receiving the 6 March 2016 email referring to “hard risk

vs. genuinely collectable” and he did not understand as a result of this email that hard
risk represented amounts viewed by CCS as unlikely to be recovered. It is clear from
its context that it was being sent for the purposes of a cash call taking place that day.
Mr Khan understands the email to be comparing what is hard risk with what is
genuinely collectable now.

91. The Authority considers that contemporaneous evidence shows that hard risk

was generally understood within CCS to be “the likely amount required to be
written off”. In any case, irrespective of his and others’ understanding as to
the precise meaning of hard risk, Mr Khan was aware that it was a type of risk
with a potentially significant impact on Carillion’s balance sheet and
profitability. He was also aware that the hard risks reported by CCS were very
large. As Mr Khan was aware, they totalled £171.8 million for CCS as at
October 2016, and increased to £310.6 million as at March 2017, by which
time Mr Khan was Group FD. They were not only large in absolute terms, but
also relative to Carillion’s underlying PBT for the full year 2016, which was
£178 million.

92. Further, Mr Khan was aware that hard risk was reported by CCS as part of

Carillion’s quarterly budgeting and reforecasting process, a well-established
and important process which formed the basis on which CCS set out its
expected financial performance for the year, as assessed (amongst other
things) against market expectations. Mr Khan was frequently and regularly
informed of hard risk as part of this process. In those circumstances, it was
not reasonable for Mr Khan simply to rely on the formal reporting of risks
through, for example, the Position Papers, when the formal reporting was
inconsistent with the hard risk figures. Instead, Mr Khan needed to take
meaningful steps to address the increasing levels and accumulated values of
hard risk being reported to him, but he did not do so.

93. The Authority considers that the evidence does not support Mr Khan’s

submission that the external auditors had been presented with hard risk
schedules in the past and had indicated that they were neither helpful nor
reliable.

94. CCS reported hard risk figures in order to highlight financial risks and

exposures and to enable Group management to take a view on whether, and
if so how, to deploy central provisions and contingencies at Group level, by
means of ‘hard risk relief’ or otherwise. The amount of hard risk relief
allocated to CCS represented an amount by which CCS was permitted to adjust
its overall profit forecast downwards to take account of hard risk. During the
Relevant Period, Mr Khan, as the Group FD, had responsibility for determining
how much hard risk relief should be allocated to CCS. The Position Papers
sent to the external auditors displayed the position after the application of
hard risk relief. The application of hard risk relief thereby altered the values
ascribed to particular projects for the purposes of preparing Carillion’s
published accounts.

95. Mr Khan’s submission that he understood “genuinely collectable” to mean

“genuinely collectable now” is not what the 6 March 2016 email said and is
inconsistent with the supporting analysis attached to the email. Mr Khan has
failed to identify any contemporaneous documents which support his asserted
understanding of hard risk.

96. MCSs were instigated at Mr Adam’s request when Mr Khan was the Group FC and were

loosely used as an agenda for each MCRM in order to identify those contracts which
required particular attention. The MCS was not a document that was intended to
capture risks that needed to be written-off. The “best”, “likely” and “worst” figures set
out in the MCS were never discussed or raised at the MCRMs, and Mr Khan understood
them to be ranges of outcomes if Carillion agreed to settle various claims for cash with
no further actions. Neither the MCS nor the MCS figures were ever discussed in detail
at the MCRMs. Mr Khan understood the MCS to be an illustrative commercial tool, with
no prescribed methodology underlying the reported ranges, no standardised approach
to their use between different Business Units, and no external validation applied to
their preparation at any level before reaching Group management. He therefore did
not consider the MCS to be useful to him for financial reporting purposes.

97. The Authority considers that the evidence shows that Mr Khan was involved

in the creation of the MCS in March and April 2014. The MCS was a report
prepared for the purpose of a quarterly MCRM between senior management
at Divisional and Group level within Carillion. It was intended to be a central
summary capturing all of the major contract exposures across the Group.
Given the size of the “likely” outcomes recorded in the MCSs during the
Relevant Period, and the purpose for which the MCS was created, the
Authority does not consider Mr Khan’s submission that the MCS was not
significant for Carillion’s financial reporting to be credible.

98. Mr Khan’s assertion that he understood the MCS to be a commercial

document, not a financial reporting tool, is contradicted by the documentary
evidence. He has also not identified any basis for believing that the MCS
report conveyed anything other than the natural and ordinary meaning of a
“likely” exposure. In light of the size of the figures reported, which identified
significant losses even on the “best” case scenario, Mr Khan unreasonably
failed to take any steps to address the inconsistency between the MCS
reporting and other management and financial information within Carillion,
and unreasonably failed to inform the Board and the Audit Committee of the
MCS reporting.

Peer reviews

99. The peer review process was not significant to Carillion’s control framework. It was

designed to share best practice and ideas to enhance process improvements, rather
than to scrutinise the reporting of a commercial position. Mr Khan regarded the peer
review process as a useful control. However, the numbers used did not reflect
management adjustments that would be made by management at Business Unit and
Business Division level, and therefore the figures that would flow through the
recognised core reporting process, and so there was no need for the peer review
numbers for individual contracts to be provided to the Board or to the Audit Committee.

100.
Peer reviews of major projects by experienced contract managers included

consideration of the financial position of the relevant projects and the
contract accounting judgements applied to them. During the latter part of
2016 and the Relevant Period, the peer review recommendations on certain
major projects identified significantly worse financial performance than the
budgeted forecasts. Although Mr Khan did not receive peer review reports,
he was aware that there was no formal process to ensure that a peer

reviewer’s recommendations were taken into account. In fact, no meaningful
action was taken in response to the conclusions of the peer reviews and the
peer review recommendations were not taken into account in the reports to
the Board and the Audit Committee of the financial performance of CCS’s
projects. As a result, this was another source of information, along with the
increasing managements adjustments, hard risks, MCS exposures and
divergences from budget forecasts for major projects, that the Board and the
Audit Committee were not aware of and did not take into consideration in
approving the Announcements.

Reporting to the Board and the Audit Committee

101.
Mr Khan does not accept that he failed to inform the Board and the Audit Committee

about matters relevant to their review and approval of the Announcements, or that the
Board and the Audit Committee were not provided with sufficient information to enable
them to fulfil their duties in overseeing Carillion’s financial performance.

102.
The Board was provided with more robust and consistent data than the Overtrade

Reports, which enabled it to understand the status of the Projects and the judgements
made. Similarly, the Audit Committee was provided with sufficient information,
including the reports of the external auditors and the Group FD’s report, to enable it
to assess the financial reporting decisions. The information received by the Board and
the Audit Committee could have prompted further questions about CCS’s financial
performance and that of the Priority Contracts. Senior members of CCS addressed the
Board and the Audit Committee directly in relation to the Priority Contracts and were
best placed to inform them of any matters concerning CCS about which they needed
to be aware.

103.
Mr Khan’s approach was cautious, prudent and focused on providing clear and

complete financial data to the Board. His actions are not consistent with an individual
who was seeking to hide information from the Board or, ultimately, shareholders.

104.
The Authority does not agree that the Board and the Audit Committee were

provided with sufficient information to enable them to understand the status
of the Priority Contracts and the contract accounting judgements made. None
of the materials provided to them referred to hard risk, the likely exposures
reported in the MCS, or the significant and increasing divergence between the
information provided to them and the CCS Project Teams’ and management
teams’ assessments of contract performance. Mr Khan was aware of these
warning signs and must have been aware that they were matters which
needed to be brought to the attention of the Board and the Audit Committee.

105.
Mr Khan’s submission that senior members of CCS were best placed to

inform the Board and the Audit Committee of any matters concerning CCS
about which they needed to be aware fails to have regard to the
responsibilities that Mr Khan himself owed as Group FD, and in any case does
not excuse his own failure to inform them.

106.
The fact that the Board and the Audit Committee could have asked for

further information fails to take into account that the warning signs were not
mentioned in the materials provided to them, and so it could not be expected
that they would ask questions about them. Given Mr Khan’s awareness of the
warning signs and that the Board and the Audit Committee were not aware of
them, the Authority considers that Mr Khan acted recklessly in not ensuring
that these were brought to their attention.

The Priority Contracts

107.
The case against Mr Khan is based on just a few of the thousands of documents

that would have been available to him. They were not part of the processes and

controls for financial reporting, and undue and inappropriate prominence and weight
have been attached to them.

108.
There is no evidence that Mr Khan understood or suspected that the numbers

reported to him in respect of the Priority Contracts, and by him to the Board, were
incorrect; or that hard risk and MCS figures better reflected the IAS 11 judgement of
the managers and directors of CCS in relation to the Priority Contracts; or that there
was any discussion or questioning within Carillion as to the misstatement of values in
relation to the Priority Contracts.

109.
Mr Khan’s recklessness and knowing concern in Carillion’s breaches is

based on documents which show that he was aware of warning signs and
failed to take appropriate steps to address them and to bring them to the
attention of the Board and the Audit Committee. These warning signs were
brought to his attention on a number of occasions, by a variety of means and
through important processes within Carillion, including through CCS PRMs
and through the budgeting and reforecasting process. Given the nature and
cumulative effect of the warning signs, Mr Khan must have appreciated that
this information would be highly relevant to the deliberations of the Board
and the Audit Committee, and the risk that Carillion’s systems and controls
would be inadequate, if due consideration was not given to such information.

110.
Mr Khan must have been aware, as a result of receiving the hard risk and

MCS figures, and figures showing the divergences between the assessments
of financial performance by CCS’s Project and management teams and the
financial performance as reflected in Carillion’s budgeted forecasts, that there
was a risk that the figures reported to the Board were incorrect. However, he
did not make enquiries to satisfy himself that the figures reported to the
Board were appropriate.

The Announcements

111.
The assertion that Carillion’s 2016 financial statements were misstated is

unsubstantiated. Carillion’s external auditors were asked to undertake a specific
review to identify whether there had been a material misstatement of the financial
position as at the 2016 year end, and concluded that a prior year adjustment was not
necessary and thus that the conditions justifying the write-down arose in 2017. No
evidence has been put forward to demonstrate that this conclusion was wrong. In any
event, Mr Khan did not know or suspect that the financial statements were misstated
at the time of the Announcements.

112.
The wording of the March Results Announcement reflected the fact that some of

the business’s contracts were in markets that were challenging and that a degree of
rebalancing was necessary. The overall sentiment of the announcement was that
Carillion was operating in difficult markets with some difficult contracts and 2017 was
going to be a period of retrenchment. Mr Khan considered that the wording was
appropriate, given his understanding of the financial position at the relevant time. The
issues which subsequently emerged in relation to the Priority Contracts and which
informed the July 2017 write-downs were not apparent at the time of the March Results
Announcement.

113.
At the time of the preparation of the May Announcement, no individuals in CCS had

raised with Mr Khan that the reported numbers in relation to the Priority Contracts, on
which the Announcement was based, were incorrect. He therefore had no reasons to
doubt the reported numbers.

114.
Mr Khan’s update to the Board for its meeting on 3 May 2017 was considered to be

a pessimistic assessment of the position, but that and the discussions at the meeting
led to a redrafting of the AGM statement to add the words “challenging contract
positions”. Mr Khan was satisfied that the May Announcement, as re-drafted following
the 3 May 2017 Board meeting, was accurate. The May Announcement did not suggest

that the challenge arose only in international markets; the phrase “particularly in”, in
reference to overseas markets, cannot be read as excluding everything beyond those
markets. It was not considered necessary at that time to make express reference to
the CCS contracts in the May Announcement, as the executive directors and the Board
did not understand the financial position to have deteriorated significantly.

115.
The Authority considers that the evidence shows that Carillion’s 2016

financial statements were misstated. The revenue and profit/margin figures
for the Group and Construction Services (excluding the Middle East) in the
March Results Announcement were misstated because they did not accurately
reflect the financial performance of the Priority Contracts. In particular,
Carillion failed to recognise the costs and revenue associated with these
projects in accordance with IAS 11. The revenue and profit/margin figures
were materially overstated as a result. The positive statements for 2017 for
Group and Construction Services (excluding the Middle East) were similarly
not justified because they did not take account of facts and matters known to
Carillion and Mr Khan regarding CCS’s financial position by the date of the
announcement.

116.
The Authority does not agree that the overall sentiment of the March

Results Announcement was that Carillion was operating in difficult markets
and that 2017 was going to be a period of retrenchment. Rather, the
announcement
described
Carillion’s
performance
as
“in
line
with

expectations”, with the document published alongside it stating that
“Revenue grew strongly by 21 per cent” in Construction Services (excluding
the Middle East) and confirming that the operating margin for this segment
“remains within our target range of 2.5 per cent to 3.0 per cent”. It described
the ambition for this segment in 2017 as being to “maintain revenue and
profit broadly at their current levels” and referred to Carillion having a “good
platform from which to develop the business in 2017”. Given his knowledge
of the warning signs, Mr Khan must have appreciated the risk that these
statements were inaccurate.

117.
The tenor of the May Announcement was that nothing had materially

changed since the March Results Announcement. This was not an accurate
depiction of the Group’s trading as at 3 May 2017, which was materially
affected by the adverse and deteriorating financial performance of the Priority
Contracts.

118.
The Authority considers that the comment in the May Announcement

regarding managing challenging contract positions, was not sufficient to
provide an accurate depiction of the Group’s trading as at the date of the
announcement, since it was explicitly linked to international markets and did
not refer to the UK. The comment was expressly linked to the similar
statement made in the March Results Announcement, which was specific to
the Middle East and Canada. It did not convey significant problems within
Carillion’s UK construction business (CCS).

119.
The Authority does not consider that the external auditors’ conclusion that

no prior year adjustment was necessary demonstrates that the financial
statements were not misstated. In reaching their conclusion, the external
auditors were provided with inaccurate information and material information
was withheld from them, including the clean Position Papers and details of
hard risks and MCS exposures.

120.
The Authority is not permitted to impose a financial penalty in respect of Mr Khan’s

alleged knowing concern in the alleged breaches of LR 1.3.3R, Listing Principle 1 and
Premium Listing Principle 2 because the Warning Notice was not issued within three

years of the date on which the Authority had information from which the alleged
misconduct could reasonably be inferred.

121.
Mr Khan was specifically named in the document referring the matter to the

Authority’s Enforcement division on around 25 September 2017, which was based on
information held by the Authority over three years before 18 September 2020, the
date the Warning Notice was issued. The referral stated that there were circumstances
suggesting contraventions by Carillion because of inadequate systems and controls,
contraventions that Mr Khan is now alleged to have been knowingly concerned with.
In the circumstances, the Warning Notice issued on 18 September 2020 is time-barred.

122.
The Authority does not agree that it is time-barred from imposing a

financial penalty in respect of the breaches of LR 1.3.3R, Listing Principle 1
and Premium Listing Principle 2. Section 91 of the Act requires the Authority
to issue a warning notice within three years of the date on which it first knew
of a breach of the Listing Rules or had information from which it could
reasonably be inferred. Pursuant to Jeffery6, the correct approach to the issue
of limitation is “first, to determine what the misconduct is that the Authority
contends that [the person] is guilty of, and secondly to determine the earliest
date on which the Authority knew of the misconduct or had information from
which the misconduct could reasonably be inferred.”

123.
In summary, the particular misconduct alleged against Mr Khan, as set out

in the Warning Notice given to him (and repeated in this Notice), is that he
was knowingly concerned in breaches by Carillion of LR 1.3.3R, Listing
Principle 1 and Premium Listing Principle 2. This is as a result of his failure
to act in response to numerous warning signs highlighting financial risks and
exposures associated with contract accounting judgements made within CCS,
for example by failing to bring these matters to the attention of the Board and
the Audit Committee and by failing to ensure that the content of the
Announcements appropriately reflected them. As at 18 September 2017 (i.e.
three years prior to when the Warning Notice was issued), the Authority did
not have information concerning any of the warning signs identified in the
Warning Notice or Mr Khan’s failure to respond appropriately to them.
Accordingly, the Authority did not have information from which Mr Khan’s
breaches could reasonably be inferred.

124.
Further, the Authority notes that the decision to refer the matter to the

Authority’s Enforcement division on 25 September 2017 only concerned
Carillion as a firm and not any individual. Further, the Investigation
Recommendation stated that the Authority did not have “sufficient
information to establish whether any of the directors were knowingly
concerned and or responsible for the alleged breaches”.

The proposed sanction

125.
Without prejudice to Mr Khan’s primary position that he was not knowingly

concerned in breaches by Carillion, should the Authority consider it appropriate to
impose a financial penalty on Mr Khan, it should be lower than that proposed and
should be no greater than £41,693.

126.
The Relevant Period should end at the latest on the date of the May Announcement,

namely 3 May 2017. Mr Khan’s income for the purposes of calculating relevant income
should therefore be £490,500.

127.
Even if the Relevant Period ends on 10 July 2017, the relevant income should be

£501,000 because it should not include a payment to Mr Khan in respect of holiday
that he did not take. He received this payment because his employment was
terminated early in September 2017 and so, at the time of termination, he was unable

6 Andrew Jeffery v the Financial Conduct Authority: FS/2010/0039

to enjoy a period of paid leave. His income throughout the Relevant Period was the
same, whether or not he took leave. Accordingly, it is not appropriate for this payment
to be included in the calculation of his earnings between July 2016 and July 2017.

128.
The seriousness of Mr Khan’s breaches should be assessed as level 2 rather than

level 4. Carillion’s liquidation was not a consequence of the alleged breaches, but was
the result of other distinct issues, so should not be taken into consideration in assessing
the impact of the breaches. Systemic weaknesses in Carillion’s procedures should also
not be taken into account, as they were in place long before he became Group FD and
he was not in position long enough to change those systems. In addition, if Mr Khan
was knowingly concerned, it was inadvertently, rather than recklessly.

129.
Various mitigating factors have not been taken into account in the penalty

calculation. Mr Khan was only the Group FD for a short period, had no previous
disciplinary record and fully cooperated with the Authority’s investigation and with
investigations by other agencies. He also took steps to improve the level of reporting
to the Board when Group FD, and there was little time for him to remediate any
systemic failure as it existed before he took up his position as Group FD. These
mitigating factors merit a 15% reduction.

130.
The Authority considers that it is appropriate to impose a financial penalty

of £154,400 in respect of Mr Khan’s knowing concern in Carillion’s
contraventions of Article 15 of MAR, LR 1.3.3R, Listing Principle 1 and
Premium Listing Principle 2.

131.
The Authority considers that the appropriate end date for the Relevant

Period is 10 July 2017, the date that Carillion announced the contract
provision of £845 million and thereby corrected the misleading information in
the Announcements.

132.
The Authority considers it is appropriate to include Mr Khan’s unused

holiday entitlement as part of his relevant income as, by not taking holiday,
Mr Khan was in effect earning income which was then paid out on his
departure.

133.
The Authority has concluded that Mr Khan’s breaches were reckless and

that, having regard to all relevant factors, in particular those set out in
paragraphs 6.11 and 6.12 of this Notice, it is appropriate to assess them as
seriousness level 4.

134.
The Authority is not alleging that the breaches by Carillion and Mr Khan

resulted in Carillion’s liquidation. However, the public nature of Carillion’s
business, the size and scope of the business, and Carillion’s subsequent
liquidation have undermined confidence in the financial reporting regime.

135.
The weaknesses in Carillion’s procedures, systems and controls were

present when Mr Khan was the Group FC and continued during his time as
Group FD, and so the Authority does not agree that he did not have the
opportunity to address them.

136.
The Authority acknowledges that Mr Khan only became Group FD six

months prior to the announcement in July, but does not consider this to be a
mitigating factor in circumstances where he was the Group FC beforehand
and was aware of certain of the warning signs and the procedures in place at
Carillion in that role. The Authority does not consider that any improvements
that Mr Khan made to the reporting to the Board amount to a mitigating
factor, given that he was aware that the warning signs were not being
brought to the Board’s attention.

137.
The Authority acknowledges that Mr Khan attended a voluntary interview,

but considers that he did not show any exceptional cooperation during his
investigation which merits a Step 3 mitigation discount. Similarly, the

Authority acknowledges that Mr Khan has no prior disciplinary history with
the Authority, but does not consider that this merits a reduction in the
financial penalty.

Introduction of new material following issue of the Warning Notice

138.
It was inappropriate for the Authority to introduce new material into the

proceedings after the Warning Notice was issued.

139.
Mr Khan was given the opportunity to make, and did make, further written

representations in respect of the new material produced by the Authority
following the issue of the Warning Notice. He also made oral representations
following the disclosure of the new material. In the circumstances, the
Authority considers that Mr Khan has been given a fair and reasonable
opportunity to make representations in respect of this new material and that
it is not unfair for the Authority to have regard to this material in reaching its
decision.