Reverse Factoring Accounting Errors Led to Carillion Collapse
Although reverse factoring is becoming an increasingly popular supply-chain finance option around the globe, proper accounting procedures should be in place throughout the process—an arrangement that fell short and may have caused the demise of U.K. construction giant Carillion, which collapsed in January.
According to an article in Supply Chain Management Review, reverse factoring occurs when a supplier sells discounted invoices to a bank and pays them at a later date. Meanwhile, suppliers are getting paid earlier. In the case of Carillion, Moody's Investors Service reported on March 13 that the construction and services group lacked "explicit disclosure" in its agreement with suppliers and banks.
"Carillion's approach to its reverse factoring arrangement had two key shortcomings: the scale of the liability to banks was not evident from the balance sheet, and a key source of cash generated by the business was not clear from the cash flow statement," said Moody's Vice President and Senior Credit Officer Trevor Pijper, who also authored the report, in a press release.
The reverse factoring agreement began in 2013, with the banks owed about 498 million pounds (more than $695 million), outside of the balance sheet's disclosed 148 million pounds (more than $206 million) in bank loans and overdrafts. Moody's reported that the larger amount was shared with "other creditors" and "excluded from borrowings."
Carillion also didn't disclose bridging finance from its banks as part of its cash flow, which would have contributed nearly 100% of its cash generated.
-Andrew Michaels, editorial associate