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Carillion And The Dangers Of Overstating Your Balance Sheets

The collapse of construction giant Carillion has been the dominant news story of the week, with a knock-on effect to the firm’s 20,000 UK employees, their pension funds, and those to whom they provided services. It has also led many journalists, and others, to question why the company received such a glowing financial statement from its auditors in its most recent annual report, published just ten months ago. While those responsible for the report are now set to be heavily scrutinised by the Financial Reporting Council, there are lessons to be learnt for businesses of all sizes around the dangers of painting a falsely rosy picture of your financial outlook.

In George Orwell’s Big Brother, protagonist Winston Smith famously realises the power of the State is such that, should they declare ‘two plus two equals five’, this would become the truth assuming everybody is sufficiently indoctrinated into believing it. In the real world, this is not a business practice others should adopt, or could even get away with adopting. Perhaps the most famous example of this going wrong in recent years was the Enrol scandal, where directors thought they could get away with presenting a healthy business amid a backdrop of mounting debts.

The disintegration of Carillion’s fortunes despite its continued profitability illustrates the importance of keeping a healthy – and accurate – balance sheet, and keeping an eye on debt.
 

Adam Gale Online Editor, Management Today

Aside with the very real risk of damaging your company’s reputation if you get found out, the main danger of creating misleading figures on your financial reporting is that these figures can be held against you, potentially for years to come. Taking a simple example, say your company makes an annual profit of £10,000, but your balance sheet, whether by fault or design, suggests a £20,000 profit. The following year, your firm makes £15,000. The false figures of the previous year may have directly led to dangerous repercussions, with your company unable to report a healthy (and legitimate) rise in profits.

In a nutshell, any financial anomalies will remain in the system until such a time as your company can own up, or be found out. Therefore, it’s vitally important to keep your accounting above board and well checked at all stages. Informi’s Find an Accountant or Bookkeeper tool could help you find a professional service near you that can help with legitimate reporting.  

 

Darren Nicholls is the Product Manager for Informi

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