GOVERNANCE, ETHICS AND THE LEGAL AND

REGULATORY ENIRONMENT

INDIVIDUAL WRITTEN ASSIGNMENT

SID:
Word Count:

Executive Summary

The purpose of this report is to analyse the factors contributing to the collapse of
Carillion Plc, emphasising the role of corporate governance and audit practices in the
company’s fall. For this detailed report, comprehensive data has been collated from various
scholarly references such as journal articles, industry reports, and authoritative books which
gives deep insight into corporate governance and risk management practices. The research
suggests that lacking board oversight, poor risk management and a short-term approach
played a crucial role in the emergence of the fraudulent activities that led to Carillion's
collapse. By these findings, the paper suggests the adoption of tight management standards
like the ones introduced by the Sarbanes-Oxley Act in the USA and independent auditor
practices as exercised in the Netherlands, to ensure proper disclosures and corporate
governance.
 Contents

Executive Summary.................................................................................................................1
1. Introduction..........................................................................................................................3
2. Factors leading to Fraudulent Activities............................................................................3
2.1 Deficient Board Oversight...........................................................................................................3

2.2 Inadequate Risk Management......................................................................................................4

2.3 Culture of Short-termism.............................................................................................................5

3. Impact of Fraud....................................................................................................................5
3.1 The Company..............................................................................................................................5

3.2 Employees...................................................................................................................................6

3.3 The board of directors..................................................................................................................6

3.4 The External Auditors..................................................................................................................6

4. Actions by the Regulators....................................................................................................6

4.1 Enhanced Audit Standards...........................................................................................................6

4.2 Corporate Governance Code Revisions.......................................................................................7

4.3 Audit Market Review..................................................................................................................7

5. Recommendations................................................................................................................7
5.1 Recommendations for the Board of Directors..............................................................................8

5.2 Recommendations for External Auditors.....................................................................................8

6. Conclusion.............................................................................................................................9
References................................................................................................................................10
 1. Introduction
Carillion PLC (here-in-after referred to as “the Company”) was a substantial
infrastructure and facilities management company situated in the United Kingdom that
witnessed compulsory liquidation in January 2018. The leads to financial stress and
accounting fraud were the catalysts of these issues. The scandal highlighted major differences
in the unfavourable presentation of the company's financial statements which were,
misrecognition of revenue, understatement of liabilities, and overstatement of asset values.
The main principle of fraud in this particular case was the financial management that
committed technological missteps in the reporting of revenue generated by long-term
contracts that did not meet the terms for recognition. Alongside this, the chief executive
delayed recording losses and impairments, which created an impression of a better- and
healthier-looking balance sheet.

The manipulation created an illusion of solid financial performance and deceived

shareholders, creditors, and the financial community relying upon distorted financial
information and leading to poor decisions derived from fraudulent financial representation.
The Company scandal not only created prolonged doubts about the extent of the company's
financial reporting but also revealed that well-built internal control mechanisms and setup of
corporate governance were missing. This case involves fraudulent accounting which can be
used to exemplify the disintegration that such dishonest accounting can lead to. The
Company affairs subsequently emerged as a rallying point for debates on tighter risk audits as
well as better corporate governance to prevent any monetary mismanagements in the future
from being repeated.

2. Factors leading to Fraudulent Activities

The downfall of the Company exposed underlying risks in corporate as well as
governance sectors, including the functioning of risk management systems and an overall
corrupt culture that allowed fraudulent practices in the organisation. The complex web of
issues among which the review of priorities, lack of availability of financial resources and the
crisis was eventually the activation of the most noteworthy UK corporate failures in recent
history.

2.1 Deficient Board Oversight

The board of directors of the Company intact some form of responsibility for the
materialisation of their negligence into the recurrence of fraudulent reporting. The directors
are supposed to be actively investing their time in management activities, questioning the
information that is presented by executives and maintaining corporate objectives along the
lines of legal and ethical standards (Brown and Peterson, 2022). Nevertheless, the directors
were held to account by the public who were not convinced of the board’s failure to provide
efficient supervision and raise issues on the erroneous financial projections that were
submitted by the management. Below is the illustration that depicts the structure of Board
Governance.

Figure 1: Board of Directors Governance Structure

The main reason for the failure involved the composition and the culture of
operational boards. The absence of critical challenges by the management facilitated the
continuation of financial misrepresentation (Kubitscheck, 2022). This began to show the
perspective of the company that was unrealistically in a positive way in financial health and
prospects.

2.2 Inadequate Risk Management

Having robust risk management processes in place is also part of responsible
governance. This should allow the identification, evaluation, and reduction of risks that can
turn out to be negative for the organisation. The rapidity at which the Company went down
had a seriously defective approach to managing risks, and the fallacy inherent in the financial
reporting and regulatory compliances (Hodge, 2019). The Company was exposed to risk
because its internal controls were incapable of detecting or preventing fraudulent accounting
practices. This included revenue overstatement and unforeseen losses (Rogers, 2018). There
were not any warnings or immediate stops that the internal controls would have given
because the regulation systems did not work properly.

2.3 Culture of Short-termism

The Company culture served as an important factor in creating an overall environment
in which financial corruption was easily possible. Profit maximisation was underlined all the
time, and sometimes this meant to disregard the long-term concerns such as the sustainable
operation and ethical business policy (Sikka et al., 2018). Such a strategy was led by the need
to maintain the level of growth and profitability on a steady basis. This need is essential to
meet the market expectations while paying attention to rewards, which accompany the
accomplishment of previously mentioned short-term goals. It would be unfortunate that the
business might have intimidated people who might be the voices of conservativism regarding
accounting practices or financial stability (White, 2023). The focus on short-term profits has
made the figures seem better, so companies faced a serious difference between the numbers
reported and the real situation.

The combination of these components generated a lenient ground for the breach of the
described norms at the Company. These fraudulent activities kept growing and also became
the norm. This was because the oversight by the board was inefficient, insufficient and
ineffective internal controls by the management, and the corporate culture was problematic.
As a result, these were not detected and handled on time. The Company example provides the
best clarity on the paramount importance of resilient governance structures, stringent risk
management, and corporate cultures that help achieve the long-term desired accommodations
rather than opportunistic tactics.

3. Impact of Fraud

3.1 The Company

Revealing the unethical actions resulted in the Company being forced into
compulsory liquidation which was a distress. The liquidation resulted in an enormous loss of
employment, an abrupt cancellation of many construction projects as well as financial losses
(Hajikazemi, 2020). This was so high as to cease business operations completely.
3.2 Employees
The liquidation left the Company workers in a dire situation. This made them lose
their jobs unexpectedly and in turn, their financial stability and career plans were suddenly in
danger (Chen, 2022). Furthermore, the mounting pension deficits compromised the
retirement security of the workers, which worsened their welfare.

3.3 The board of directors

The board of directors was accused of an amasing inefficiency in its supervision,
which, led the company to its end. This failure seriously impaired their professional standing
(Garrow, 2019). The BOD also became target of different investigations intending to
determine the degree of negligence or participation in the financial incorrect reporting.

3.4 The External Auditors

The Company auditors were criticised for their inability to perceive the errors in the
financial statements. By pointing at their deficiencies as external auditors, the incident raised
major concerns about the rigour and effectiveness of external auditing practices, in addition
to calling for improved audit accountability and performance.

4. Actions by the Regulators

Following the example of the Company case, a corporate failure in the UK which
uncovered sensitive issues in auditing and corporate governance, regulators are now making a
series of tough measures to reform corporate governance and auditing procedures. These
plans aim at improving the level of transparency and accountability in the business
environment in the UK.

4.1 Enhanced Audit Standards

Along with revising and improving the regime of regulation over auditors,
accountants, and actuaries which is administered by the Financial Reporting Council (FRC)
of the UK, an emphasis is also being laid on bringing out auditors under the observations. It
is the auditors who stand on the frontline of safeguarding the integrity of business against
fraud and other ethical violations. The FRC has revised audit standards and requires a higher
level of audit standards as well as accountability through stricter processes and a greater
degree of scepticism (Council, 2019). Such extended guidelines are designed to enhance the
outlook of auditing by supporting that companies' financial statements adequately depict the
nature and extent of their operational performance and financial standing.
4.2 Corporate Governance Code Revisions
The solution to the Company scandal was mainly related to the question of whether
the Corporate Governance Code then in force had weaknesses that led to similar failures in
the future. The UK has seen an upgrade of the Corporate Governance Code to include a
stronger focus on long-term sustainability and executive directors' responsibilities in their
relations with the holders of the capital. Code changes specifically provide for the
independent role of non-executive directors (Solomon, 2020). The directors now participate
more actively in the financial statements control and risk management activities, guiding and
producing informed and accurate outputs. The principle purpose is to regulate a governance
system that will include ethical conduct and a rigoros monitoring system.

4.3 Audit Market Review

The problem of the Company Case has partially been shown with the mentioned
conflict of the company's auditing and consulting services. This leads to trustworthiness. In
turn, the Competition and Markets Authority (CMA) have recently carried out such an
analysis of the audit market with a suggestion for separation of the service provided from the
consultancy function (Damitio, 2023). This duplication is meant to make auditors take their
duties objectively and dispassionately instead of conflict arising from those non-audit
relationships with their clients. These structural reforms are viewed as key and crucial to
restoring integrity in audit services and enabling auditors to act with fairness towards the
companies.

The full scope of these regulatory changes shows that the authorities of the UK are
very serious about reforming corporate governance and auditing standards through
regulations. Through an audit quality enhancement drive, a revamp of self-governance codes
to foster support of long-term sustainability and exploration of audit market conflicts of
interest, the UK aims to restore corporate management and reporting practices faith and put
the economic macro environment back on the right track. These reforms are key to not only
impeding future scandals but preserving the UK as an influential world business centre.

5. Recommendations
For the exclusiveness of the governance structures in the organisations and for
ensuring public trust in the company, building a rigid legal framework and culture of
transparency and accountability are important. Emulating international experience will
empower the UK with the framework to prohibit the reoccurrence of serious corporate crises.
Two meaningful conclusions from the successful model of the USA and the Netherlands are
the Board of Directors and the outside auditor respectively.

5.1 Recommendations for the Board of Directors

The Sarbanes-Oxley Act of the U.S. which strengthens the audit and oversight process
and introduces better accountability is a good case study for improving governance through
extensive internal controls (Coates IV, 2007). SOX, especially those parts related to the
personal liability of senior members of the organisation over the financial statements'
accuracy, could be extremely useful. These provisions enact that CEOs/CFOs certify the
financial statements. This brings them closer to the liability for the appropriate financial
information disclosure. This sort of accountability will lead to a greater instance of care and
steadfastness in financial reporting (Lobo and Zhou, 2010). This in turn would discourage the
manipulation of financial data and the beginning of a governance culture that has as its
primary focus transparency and ethical practices. The UK need to borrow and tweak the same
kind of regulations so that boards can have strong oversight power and the executives in top
positions strictly adhere to the accuracy and honesty rules while declaring finances.

5.2 Recommendations for External Auditors

As for the auditing part, the Dutch model originates a restriction which stipulates that
every auditor shall be rotated after the expiration of eight years in control. It precludes the
audit work’s persistence in an auditor-client partnership serving to engender conflicts of
interest or lack of focus (Collier and Zaman, 2005). The auditing companies would get rid of
old auditors and hire new ones to contribute to the financial view mode. Moreover, auditors
would be under pressure to switch auditees and would try harder not to become too involved
with one company to avoid biases and to remain objective. The adoption of the code of ethics
is similar to the International Federation of Accounting Professionals (IFAP) which
emphasises integrity, objectivity and professional competence. This elevates the level of
ethics in the UK auditing industry (Humphrey et al., 2009). The IFAC Code of Ethics is the
ultimate professional ethics code for auditors. Consequently, the adoption of such principles
on the part of the auditor can give the reputation and reliability to audit as a profession.

These recommendations should be established through new legal restrictions, the

establishment of a new regulatory authority, or the strengthening of the existing authorities
for their effectiveness with compliance. However, the magnitude is considerable. With the
reinforcement of board directors' accountability as well as audit independence and ethics, the
UK has a chance to create an environment for businesses less exposed to fraud and a
governance body that could come closer to the global industry best practices.

6. Conclusion
The Carillion PLC scandal produced quite clear evidence of serious governance and
financial management failures that eventually brought on the most humiliating corporate
collapse ever in UK history. This has earned unanticipated retaliation from UK which has
experienced a substantial reform to improve corporate governance and audit standards. This
report is intended to implement further controls on transparency, make the board more
answerable and sanitise financial reporting, ultimately endeavoring to protect the economy
from similar incidents emerging in the future. This proposal is a foundation of the restoration
of trust and harmony in the corporate environment of the UK.
References
Brown, G. and Peterson, R.S. (2022) The Bureaucratic Board: The Big Four. Disaster in the
Boardroom: Six Dysfunctions Everyone Should Understand (pp. 137-144).

Chen, J.J. (2022) Carillion PLC. In International Cases of Corporate Governance.

Singapore: Springer Nature Singapore

Coates IV, J.C. (2007) The goals and promise of the Sarbanes - Oxley Act. Journal of
Economic Perspectives, 21(1), pp.91-116.

Collier, P. and Zaman, M. (2005) Convergence in European corporate governance: The audit
committee concept. Corporate Governance: an International Review, 13(6), pp.753-768.

Council, F.R. (2019) Developments in Audit 2019. London, UK: Financial Reporting Council

Damitio, D. (2023) Auditing Overseas: How the United States Can Learn from Recent
Financial Audit Reform in the United Kingdom. New York University Law Review, 118,
p.263.

Garrow, N., Awolowo, I.F. and Growe, G. (2019) Annual reports: Fact or fiction? Are there
governance implications? Journal of Leadership, Accountability and Ethics, 16(1), pp.
21-26

Hajikazemi, S., Aaltonen, K., Ahola, T., Aarseth, W. and Andersen, B. (2020) Normalising
deviance in construction project organisations: a case study on the collapse of Carillion.
Construction Management and Economics, 38(12), pp.1122-1138.

Hodge, N. (2019) Learning from the Collapse. Risk Management, 66(1), pp.30-34.

Humphrey, C., Loft, A. and Woods, M. (2009) The global audit profession and the
international financial architecture: Understanding regulatory relationships at a time of
financial crisis. Accounting, Organisations and Society, 34(6-7), pp.810-825.

Kubitscheck, V. (2022) Risk Management in the Boardroom. A Director's Guide to

Governance in the Boardroom, pp. 93-134

Lobo, G.J. and Zhou, J. (2010) Changes in discretionary financial reporting behaviour
following the Sarbanes-Oxley Act. Journal of Accounting, Auditing & Finance, 25(1),
pp.1-26.
Rogers, D. (2018) Not-so-sudden death: How Carillion disguised its ailing finances just
enough. Construction Research and Innovation, 9(2), pp.44-47.

Sikka, P., Hudson, A., Hadden, T., Willmott, H., Christensen, J., Cooper, C., Haslam, C.,
Ireland, P., Parker, M., Pearson, G. and Pettifor, A. (2018) A better future for corporate
governance: democratising corporations for their long-term success. Review by Shadow
Business Secretary Rebecca Long-Bailey MP and Shadow Chancellor of the Exchequer
John McDonnell MP, House of Commons, Westminster London, pp. 8-67

Solomon, J. (2020) Corporate Governance and Accountability. Illinois, USA: John Wiley &
Sons.

White, J.N. (2023) Make Better Strategic Decisions: How to Develop Robust Decision-
making to Avoid Organisational Disasters. London: Taylor & Francis.