A major drawback of the New Zealand business sector is the absence of independent analysis of important company issues, including corporate failures.
Why did Mainzeal collapse? What happened at Feltex Carpets, Solid Energy, Wynyard Group, Pumpkin Patch, CBL Group, Pike River and other failed companies? What lessons can we learn from these fiascos?
The Securities Commission, the FMA's predecessor, published detailed company reports but these stopped 30 years ago. Investors, and the New Zealand business community, have been disadvantaged by the absence of these independent studies.
By contrast, the British House of Commons released a 100-page report into the collapse of Carillion in mid-May. This was just four months after the massive construction group went bust.
The report was prepared by the British Parliament's business, energy and industrial strategy, and work and pensions committees.
Meanwhile, our parliamentarians put their heads in the sand after important company collapses, including the Crown-owned Solid Energy.
This is unfortunate, particularly as far as the construction sector is concerned, as many of these builders are hopelessly inefficient.
This has been clearly demonstrated by Fletcher Building's construction problems over the past 18 months.
Customers, subcontractors, suppliers, investors and lenders would benefit from detailed independent analysis of our failed companies.
Carillion, which had a sharemarket value of £60 billion ($115b) and more than 40,000 employees in mid-2017, was established as a separate listed company in 1999 after demerging from Tarmac.
Shortly after the demerger it embarked on an aggressive acquisition strategy which included the purchase of Mowlem for £350 million, Alfred McAlpine for £565m and Eaga for £298m.
These were mostly funded by debt and included large components of goodwill.
Fletcher Building also had these acquisition-related characteristics.
The British Parliament's report stated: "Carillion rejected opportunities to inject equity into the growing company and instead funded its spending spree through debt.
Borrowing increased substantially between 2006 and 2008 as Mowlem and Alfred McAlpine were bought. It then almost trebled between 2010 and 2012 to help fund the Eaga purchase".
It went on to state that Carillion's overseas forays were also largely disastrous. For example, the group was contracted to build a major residential, hotel and office development in Qatar, which was due to be completed in 2014 but remains unfinished.
The customer is now claiming £200m from Carillion.
But one of the main problems with Carillion's acquisition strategy was that it acquired companies with large Defined Benefit (DB) pension scheme liabilities (schemes where retirees are supposed to receive regular fixed payments).
Mowlem had a DB deficit of £33m when purchased in 2006 and Alfred McAlpine £123m when acquired in 2008. By the end of 2011 these two schemes had a combined deficit of £424m.
DB deficits were also major contributors to the poor performance of GPG, the former Sir Ron Brierley-controlled NZX-listed company.
The parliamentary report revealed that Carillion had responsibility for funding 13 defined benefit schemes when it collapsed with an estimated pension liability of around £2.6b, the largest ever in Britain.
The 27,000 members of these schemes will now receive reduced pensions.
The report stated: "Honouring pension obligations over decades to come was of little interest to a myopic board who thought of little beyond their next market statement.
Their proposals for funding those deficits were consistently and resolutely derisory as they blamed financial constraints unrecognisable from their optimistic market announcements.
"Meeting the pension promises they had made to their rank-and-file staff was far down their list of priorities. This outlook was epitomised by Richard Adam, who, as finance director, considered funding the pension schemes a 'waste of money'."
The report was also highly critical of Carillion's optimistic stock exchange announcements and its tardiness in paying suppliers. The report noted: "Carillion also owed around £2b to its 30,000 suppliers, subcontractors and other short-term creditors, of whom it was a notorious late payer. Like the pension schemes, they will get little back from the liquidation".
The parliament inquiry was also disparaging of Carillion's non-executive directors who were "unable to provide any remotely convincing evidence of their effective impact ... against reckless executives".
The MPs had harsh words for Alison Horner, the non-executive director who chaired the remuneration committee.
According to the report: "Horner presided over growing salaries and bonuses at the top of the company as its performance faltered.
"In her evidence to us, she sought to justify her approach by pointing to industry standards, the guidance of advisers, and conversations with shareholders. She failed to demonstrate to us any sense of challenge to the advice she was given, any concern about the views of stakeholders, or any regret at the largesse at the top of Carillion."
Unfortunately, Horner's approach is becoming more common in New Zealand as non-executive directors use independent advice commissioned by management, rather than their own judgment, to determine remuneration packages.
Much of the report's harshest criticism was directed at Carillion's auditors and external advisers.
KPMG was Carillion's external auditor for 19 years, pocketing £29m in the process.
On July 10, 2016, just 31 days after Carillion had paid a £55m dividend, the company announced a massive £845m writedown of its major construction contracts.
The parliamentary report had this to say about KPMG: "Not once during that time [19 years] did they qualify their audit opinion on the financial statements.
Yet, had KPMG been prepared to challenge management, the warning signs were there in highly questionable assumptions about construction contract revenue and the intangible asset of goodwill accumulation in historic acquisitions.
"In failing to exercise — and voice — professional scepticism towards Carillion's aggressive accounting judgments, KPMG was complicit in them."
KPMG wasn't the only Big Four accounting firm involved with Carillion. Deloitte was paid £10m as internal auditors and EY £10.8m for failed turnaround advice last year.
The parliamentary report noted that EY suggested that Carillion extend its standard terms to suppliers to 126 days.
However, EY's fees were not deferred as just three days before Carillion collapsed it was paid £2.5m with a further £3.9m paid "to a raft of City law firms and other members of the Big Four".
PricewaterhouseCoopers (PwC) had a lesser role although it advised the company and its pension schemes, then earlier this year was appointed as special managers to assist with Carillion's liquidation.
Meanwhile, PwC has been fined £6.5m for serious shortcomings in its audit of British Home Stores (BHS), the failed retailer.
The dramatic collapses of BHS and Carillion have ignited a debate about the role of the Big Four accounting firms.
Britain's Big Four generated income of £9.9b in 2016, £2.0b from auditing services and £7.9b from non-auditing services. The latter includes £1.1b of fees for non-audit services for audit clients.
The House of Commons had this to say about the Big Four: "KPMG's long and complacent tenuity auditing Carillion was not an isolated failure. It was symptomatic of a market which works for the members of the oligopoly [the Big Four] but fails the wider economy."
The committee recommended "that the Government refers the statutory audit market to the Competition and Markets Authority.
The terms of reference of that review should explicitly include consideration of both breaking up the Big Four into more audit firms, and detaching audit arms from those providing other professional services".
Any decision by the British authorities to force the Big Four to break up is expected to have consequences for Deloitte, EY, KPMG and PwC in New Zealand.
- Brian Gaynor is an executive director of Milford Asset Management.