Carillion pie MINUTES OF A MEETING OF THE BOARD OF DIRECTORS. Held by telephone meeting on Tuesday 9 May 2017 at 7.30 am

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1 Carillion pie MINUTES OF A MEETING OF THE BOARD OF DIRECTORS Held by telephone meeting on Tuesday 9 May 217 at 7.3 am Present: Mr. P.N. Green Chairman Mr. K.R. Cochrane Mr. A.J.H. Dougal Mrs. A.J. Horner Mr. R.J. Howson Mr. Z.I. Khan Jn attendance: Mr. R.F. Tapp Secretary Mr. D. Arch Stifel Mr. F.R. Herzberg Mr. P. Moorhouse Morgan Stanley Mr. T. Perry Morgan Stanley Mr. C.W.Y. Underhill Slaughter and May Minute No: ACTION 2135 Accounting Review The Chairman noted that members of the Board had been made aware of an accounting issue which had arisen with regard to the 216 year-end. Introduction Mr Howson briefed the Board. Emma Mercer had returned to the UK as FD of Construction Services, and was now six weeks into that role. She had advised Mr Adam Green, the MD, that she had identified some issues with which she was not comfortable. Mr Adam Green alerted Mr Howson on 15 April, and he asked Mr Khan to discuss the position with her. Mrs Mercer was asked to produce a report for the PRM during the following week, and it was reviewed during the PRM on 26 April. Mr Khan had worked with Mrs Mercer on the report and it had been identified that negative accruals had been applied to nine projects, of which two (Battersea and Liverpool) comprised the great majority of value. On 3 May, Mrs Mercer had raised with Mrs Dawson that she had concerns, and Mr Howson met with Mrs Mercer on 5 May immediately following his return from Doha. He had asked Mr Herzberg to work over the weekend with Mrs Mercer, Mr Adam 1

2 Green and Mr David Holmes to understand and report on the position, which he had subsequently done. He had also spoken to the FD of Building, Rob Wardle, and the outgoing FD of Construction Services, Alan Heywood. Following that work, the year-end route maps had been looked at to determine whether they could be supported either in terms of contract value increase or cost recharge to subcontractors. Options In summary, there were three options: 1. To disclose the position immediately if we were unable to generate credible route maps for the projects identifying value increase and/or cost reduction to support the year-end traded position; 2. To work through the route maps with KPMG with a view to confirming that the maps supported their year-end position, and reporting the position on a regular basis (perhaps every two days) to a subcommittee of the Board chaired by Mr Dougal and also comprising Mr Cochrane. 3. As a maturing of option 2, if at the end of the process, the Board was satisfied that the route maps had a good probability of being delivered, it would be able to satisfy itself that the year-end accounts were able to be upheld, and that no disclosure be made. Obviously if it became clear at any stage that the accounts were not able to be upheld, that would have to be announced immediately. The Projects Mr Howson turned to the larger projects, Liverpool and Battersea. In relation to Liverpool, the initial work had identified significant possible recoveries from the MEP contractor and MEP designer, as the delays to the contract had been caused by their work. It had also confirmed the possible additional value from the proposed car park, which had been under negotiation for some 15 months. c With regard to Battersea, discussions had been in hand for some 6-8 months to secure Phase 3: and then one would look to recover substantively, against the customer and supply chain. He noted the delay claims, variations and provisional sums which were already in hand amounting to 1m- 2m and 8m respectively. A contract reset had already been achieved on Battersea in December 215, which established there was a record of recovery with this customer. Mr Howson reminded the Board that in contracting, there were always degrees of uncertainty in recovery, and work was always in hand to work through that uncertainty and to improve positions in terms of value in or cost out - that was the case on these as well as other major projects including TIC Vaughn, Union Station, Mshereib and others. 2

3 Mr Dougal's comments The Chairman asked Mr Dougal to comment. Mr Dougal reported that he had had a number of conversations with the executive directors over the weekend and discussed the events: he had had subsequent discussions with Mr Herzberg. Mr Herzberg's note was now before the Board. He had not reviewed the position on each individual contract, but he endorsed Mr Howson's comments on the nature of construction contracting, noting that he had seen a number of contracts whilst on the Board where there had been a change of route map during the course of recovery and could accept that that was the case. He noted that the situation appeared to be that costs had been offset by negative accruals, which should have been included in "other debtors". Even though, for example in Battersea, there was a view that a recovery could be made, it was not put in debtors. In other words the entries were in the Balance Sheet, but in the wrong place. They were included, and the net working capital was not misstated, but the gross figure was. In essence, creditors had been reduced rather than debtors increased, which did not appear to have been flagged up in the normal way and so denied to management. Mr Cochrane questioned whether management or KPMG had been denied the information. Mr Dougal clarified that he had simply meant that the number was not in debtors - denied only in the sense that it was not accounted and disclosed in the normal place in the accounts. Mr Cochrane thanked him for the clarification and noted the need to ensure that the Board took care in describing the position: these were substantial contracts with daily oversight by management. Mr Khan noted that KPMG had been surprised that the issue had not been identified as the two key leads were intimately familiar with the construction contracts. Mr Dougal confirmed he had spoken to Mr Meehan, who had indicated that KPMG needed to review and reassess the judgements on each contract. They would separately have to consider the position at the year-end and thereafter to assess the traded position subsequent to the year-end. Mr Howson agreed, and noted that there had been significant issues post the year-end, for example with regard to the electrical supply at Liverpool. Mr Dougal noted that KPMG had indicated they were open to looking at the different positions. At present he did not feel that the Board had the facts to support a particular option: he noted also the Galliford Try situation at Aberdeen. Mr Howson confirmed that the position on Aberdeen remained under review with significant meetings in hand with the Scottish Ministers over the next two months, as explained at the previous week's Board. A chronology of the position would be kept. Mr Dougal noted that the commercial judgement applied to contracts was particularly relevant: the role of David Holmes in the review 3

would be critical. Mr Khan's position Responding to the Chairman, Mr Khan noted that Mr Howson had summarised the position well. He had not been aware of these issues until tabled by Mrs Mercer.

4 would be critical. Mr Khan's position Responding to the Chairman, Mr Khan noted that Mr Howson had summarised the position well. He had not been aware of these issues until tabled by Mrs Mercer. His initial reaction was that of rectification on a going-forward basis; however it had become clear that we had to look back and the work in hand had been focused on establishing confidence in the position. The Group's position had always been to discourage negative accruals in the business, save where cost escalation had been the consequence of supplier incompetence. Given the obvious significance of the two main contracts we needed to review the traded position - his view was that there had been incompetence and laziness in the accounting review of the contract and in recognising the position. Work had been started on the review: as had been said, there was a need to ensure the position could be justified at the year-end, and to document that and agree it with KPMG. Mr Dougal noted that Mrs Mercer, as CCS Finance Director, also needed to be satisfied, and Mr Khan noted she was part of the review group. c Mr Herzberg's report At the Chairman's request, Mr Herzberg summarised the work to date and the discussions reported in his paper. Mrs Horner noted the key question was that of disclosure. She reported on her own experience at Tesco and noted that Mrs Mercer appeared to be a whistle-blower who did not feel she was listened to - hence her conversation with Mrs Dawson. In response to Mrs Homer's question regarding the legal position, it was noted that Slaughter and May were instructed. Mr Underhill's advice to the meeting was provided under privilege. With regard to option 2, Mrs Horner felt that an independent view was required as she was wary about an in-house review and had concerns about KPMG's position given the extensive assurances that had been given as to their familiarity with the construction contracts. A decision appeared to have been taken to hold a position when that may not have been the right thing to do at the time. (_ Mr Dougal clarified that in his understanding, a decision had been taken by an accountant without the knowledge of senior management or a discussion of the exposure. In his view the entry should have been as a debtor, not as a negative accrual. Mrs Horner was concerned that individuals were directed to routes which were inappropriate and the position regarding Mr Adam 's instruction as noted in Mr Herzberg's paper. Mr Dougal confirmed that the question was whether the value can be realised whilst Mr Khan confirmed that in his view an instruction to hold the margin could not have been meant to maintain it come what may. It was 4

5 inevitable that projects would always seek to find reasons why the margin should be reduced as the contract was operational. Pressure would never be put to hold it in an inappropriate way. Mr Cochrane felt that the position raised some fairly substantial questions around the ability to manage large contracts properly, and the broader question of culture. There was a risk of over-optimism the "glass-half-full" thinking and he questioned whether there should be a broader review to assess the reasonableness in the round of the positions being taken in totality. He agreed with Mrs Horner that an independent review was required as the position seemed to ring alarm bells and raise red flags. He was not clear that independent advice of itself required disclosure. Mrs Horner noted that in the Tesco case, a review had been announced and then the result. Adviser position The Chairman reminded the Board that in this instance, it was not possible to quantify the issue - or that there was a quantification and asked the advisers for their view: Mr Moorhouse noted that he had a number of questions with regard to option 2 and invited Mr Underhill to comment. Mr Underhill's advice was under privilege. Slaughter and May advice Mr Underhill noted that the two questions were (a) do we have inside information and (b) if we do, can we justify delaying an announcement. He advised that clearly, we had information - which was that the accounting for these contracts had been questioned - but not much beyond that. It was not an instance of an obvious material misstatement - a mischaracterisation of something on the Balance Sheet was not a misstatement - and one might conclude that if you are confident having done the work that has been done that you don't have to restate the accounts you don't need to announce. If, going forward, a decision was taken that the accounts had to be restated, the decision not to announce would come under very close scrutiny. Protecting the share price was not a reason in itself. The delay question was a difficult one - do we have enough information to disclose, or do we need to examine further? In reply to Mr Cochrane, Mr Underhill noted that none of the discussion suggested that the issue suppressed profitability - if that was a possibility, it needed to be considered separately. He had approached the issue on the basis that this is a question of accounting at the year-end, recognising it is a difficult area. The executive directors' position is that the outcome is correct but the method is questionable, but they are confident about the year end. 5

6 Whether disclosure is required is about the level of confidence - if nothing changes then it is prudent and sensible validation. Discussion Responding, Mr Howson noted the point is whether there is enough information to believe the year-end numbers to have been justified. Mr Khan noted the work in hand to support the situation. Mr Dougal confirmed he did not feel that there was yet enough information to support the position one way or the other. If we started to move to a place where we could not identify the value, the position would be different. The situation was different again for the current year, which had to be dealt with on the basis of the current market position. The proposal was that the review looked at the year-end position, and that was agreed. In terms of independent advice, the question was considered as to whether advice should be as to accounting or to commercial judgement, or both. Mrs Horner noted again her concern about KPMG, but after discussion it was agreed it should be accounting advice alone. The Chairman noted that the proposal was a work plan be developed over the next two weeks including an external view to confirm the year-end position. Mr Howson noted that KPMG had suggested a slightly longer timescale based on their experience. Mr Howson confirmed that this led to a four-level position: The Carillion Working Group - Mr Herzberg, Mr Adam Green, Mr Holmes and Mrs Mercer KPMG Independent accounting review Interface with a sub-committee of the Board, comprising Mr Dougal and Mr Cochrane, and chaired by Mr Dougal The Chairman invited the view of colleagues and advisers. Mrs Horner noted she wanted Slaughter and May's view. Mr Cochrane was "comfortable" in terms that the work was assessing and reporting on the current position: he stressed that the Board needed to be very clear that it is relying on a management judgement. c He also questioned whether an independent exercise should be a broader exercise than this specific question, and felt that a management view on the misstatement or otherwise should be achievable by the end of the week. After discussion it was agreed that the independent review should relate to the question in hand - i.e. of the mischaracterisation of entries and whether the position, as reviewed, supported the traded position at the year-end. 6

7 Next steps The Chairman noted that, in a sense, the Board was always reliant on management assurance. Mr Howson confirmed that that was the case, and on the basis of the work which had been carried out over the weekend he felt that the route maps could be finalised over the week. Mr Dougal confirmed that he felt the 4 week period suggested by KPMG was too long and that perhaps a result should be sought within two weeks. Mr Cochrane stressed that it was important that we did not become "pregnant with the information." He noted that he did not want the matter "pushed into the long grass." The Chairman asked if Mr Cochrane had any concern that that was the case: it had not been at all his experience of management's handling of the issue, but if that was the case it was important that the Board should explore it. Mr Cochrane agreed that it was not, as did all other members of the Board. After further discussion the following position was agreed: Management should report by early in the coming week; Mr Dougal stressed that if in the course of investigations anything of concern were to be identified, it should be raised at once and discussed, and disclosure considered. A plan for the four-stage review noted above should be produced and circulated to the Board later in the day, creating an overview of a project plan and covering also reporting to the Board committee. The draft minutes should be produced and circulated to the Board later in the day. A Committee of the Board comprising Mr Dougal (Chairman) and Mr Cochrane be formed to oversee the review. Disclosure position The Chairman invited Mr Moorhouse and Mr Arch to give a view on whether they were content that option 2 be followed (and that there be no immediate disclosure) in the light of the discussion and next steps. Mr Moorhouse confirmed that he was, on the basis of what had been put to and discussed at the meeting. Mr Arch confirmed that he was also content given that the issue was one of a misclassification with no impact on the P&L account. The Chairman thanked colleagues and advisers. RJH RJH/RFT RFT 7

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Category Scottish Further and Higher Education: Higher Education/Plagiarism and Intellectual Property

Scottish Parliament Region: Mid Scotland and Fife Case 201002095: University of Stirling Summary of Investigation Category Scottish Further and Higher Education: Higher Education/Plagiarism and Intellectual