Putting the Con in Connaught

10:57 am - September 7th 2010

by Paul Cotterill    

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So Connaught plc, the public sector outsourcing and social housing specialist looks like it is headed for administration, and 10,000 jobs of real people doing real things are now at risk.

And why’s Connaught in so much trouble?

Because the Directors’ accounting practices meant that contract losses now being uncovered were hidden, while those same directors took millions home in bonuses.

The most recent acounts state helpfully:

Amounts recoverable on contracts represent the estimated amounts which have been earned or which valuation, under the terms of the respective contracts, have not yet been agreed with the customers.

Erm, so the contracts hadn’t been agreed, then? Doesn’t that mean they shouldn’t have shown up in the balance sheet, which was presumably a basis for those bonus calculations?

And who’s putting it into administration because of its £220m debt?

Yup, it’s RBS, bailed out to the tune of £20bn just under 2 years ago, and 84% owned by the taxpayer.

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About the author
Paul Cotterill is a regular contributor, and blogs more regularly at Though Cowards Flinch, an established leftwing blog and emergent think-tank. He currently has fingers in more pies than he has fingers, including disability caselaw, childcare social enterprise, and cricket.
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Reader comments

It’s not clear why taxpayers should bail out an insolvent business, is it?

(Perhaps I should say bail out *more* insolvent businesses as we obviously bailed out RBS itself….!)

The directors should of course be sued/prosecuted for false accounting.

The jobs aren’t really at risk though, are they, unless the same results can be delivered with fewer people? After all, the need for the service remains. Let’s get the FD and MD prosecuted and then we can move on…

Maybe I’l set up a public sector outsourcing and social housing specialist and employ 9,000 of the 10,000.

@cjcjc Administration isn’t a bail out. It’s the removal of a management team to see if what’s left in the business can be a going concern. If so, then it comes out of administration again with a new management team (and probably new shareholders).
If not, then the creditors get a share of the remaining value in the company. RBS is doing this specifically to remove the current management team and to maximise the value of its asset (the debt).

@3 I understand that. I was responding to the OP which seems to suggest that RBS should not be doing it because RBS is 84% owned by the taxpayer.

The directors should of course be sued/prosecuted for false accounting.

Steady on. I’d have thought that Connaught’s accounts (presumably prepared by independent accountants and passed by auditors) were (while heroically optimistic) technically valid. Provided they didn’t break company accounting rules (and there’s no actual suggestion that they have in the op or in the Guardian piece it links to), then the directors aren’t guilty of anything.

I don’t want to get into trouble, so I’ll take it back!

“The directors should of course be sued/prosecuted for false accounting”

Dream on Harvey Moon.

Everyone knows if you want to steal money you put a suit on and become a business man.

I don’t see it in the taxpayers interest for a state owned bank (RBS) to continue to prop up a failing business.Much of that £220m of debt due to RBS will be a loss to the taxpayer from its ownership of the bank should the company go into liquidation.

RBS is right therefore to take control of the company putting in its own management to ensure taxpayer funds are protected.

As to the directors, if they are guilty as alleged of imprudent accounting practices then their actions should be reviewed by the SFO.

However, I would like to question the actions of the auditors who having signed of the accounts presumably found no fault with those accounting practices?


That’s a moronic remark.

I would say that 99% of business men are honest and vital for a succesful economy.



Let’s agree to maintain a mutually dismissive and contemptuous view of each other’s position.

Fair enough? 🙂

“I would say that 99% of business men are honest ”

The issue is the other 1% frequently get away with dishonesty, usually moving from company to company leaving a trail of destruction and collecting their pay offs each time. In the US the Enron senior management ended up serving lengthy Jail Sentences – in the UK corrupt businessmen are rarely charged and prosecuted, and when this does happen they then get 2 years in an open prison.

Amounts recoverable on contracts represent the estimated amounts which have been earned or which valuation, under the terms of the respective contracts, have not yet been agreed with the customers.
Erm, so the contracts hadn’t been agreed, then? Doesn’t that mean they shouldn’t have shown up in the balance sheet, which was presumably a basis for those bonus calculations?

The principle’s fine. It’s how you apply it in practice (and this is necessarily subjective to some extent) that’s the difficulty. Take an example that illustrates the point. In 2009, you do £10m of work but, owing to a crap project manager, don’t actually issue the bill until February 2010. Of this £10m, £8m is covered by a contract, but £2m came from an overrun. You’re confident that you can get the client to pay for this overrun, but there’s a chance that they’re going to be pissed off, and refuse to pay any of your fee.

Do you recognise £0, £8m, £10m or any number in between these three obvious points as your 2009 revenue? Bearing in mind that recognising £0m severely distorts the accounts picture by artificially splitting income from its associated costs. And also that the government would much prefer to get its tax from your profits in as soon as possible.
(There’s no easy answer to this – it really depends on how the sector you’re in, how cautious the FD is, and the temperament of the audit partner.)

Plane shift

We are genuinely softer on crime than the US across the board.

If you would like tougher sentences for corporate fraud,I would agree but can we also have tougher sentences for murderers,burglars,violent offenders and anti-social behaviour generally too, all of which are of greater concern to the public?

15. Luis Enrique

there’s no reason not to prosecute the directors if they have been guilty of misleading financial reporting. The SFO does do it, from time to time.

it’s entirely reasonable for ‘accounts recoverable’ to include estimates relating to not-yet-agreed contracts, especially if everybody reading the accounts can see them for what they are. Less sure about basing bonuses on profits that are calculated using ’em.

here’s a very interesting post on the topic of whether company financial statements lie:


(what proportion of people are honest? does the proportion of ‘businiessmen’ who are honest differ from the population average?)


Yes , and look what a fuss the tory establishment made of those bankers who got extradited to the US for their crimes.. They squealed like little pigs, because white collar crime is not taken seriously here. Usually you just plead some medical condition like Alzheimer’s, and then make a miraculous recovery and carry on like nothing had happened. Or give a million to the tory party and then disappear off the Cyprus or somewhere in the Med.

Crime pays if you wear a suit.


99% of business people are honest? Well that would fit with the 99% of benefit claiments who are honest too… maybe us lefties have got it right about human nature after all. Hooray!

18. Luis Enrique

what does this case say about the merits of using private sector firms to fulfil state services?

One could argue that the taxpayer has benefited from buying services (like building maintenance etc.) for a price that evidently did not cover the costs of providing it (i.e. they got a bargain) and the people who are losing out are the (wealthy?) shareholders who will see their shares wiped out. Is this an example of the system working as it ought?

Constrast this to what happens when things go wrong with council owned and run maintenance arms. When things go over budget there, either tax payers have to cough up more or council services have to be cut.

But, how often do things go wrong in council run v private provision? I guess we can’t draw any conclusions until we know that sort of thing, plus the relative efficiency, on average, of the two alternatives. Also, I’m not sure how much disruption council tenants etc. will experience – presumably the administrators will want the business to keep fulfilling their contract in order to keep revenues coming in.

Didn’t realise this had been cross-posted.

Looks like FSA are on case anyway: http://www.dailymail.co.uk/money/article-1297878/Crisis-hit-Connaught-second-FSA-investigation.html

Also, ITN are looking to speak to employees for news item tonight:


Interestng comment on this over at FT alphaville http://ftalphaville.ft.com/blog/2010/09/07/335731/connaught-out-for-the-last-time/#comment-1070497

‘I followed this company for nearly three years as a stock and as company we use be investors and the yearly company visit was somthing to be hold,How ever its one of these companies that was put together by take overs and expanded rapidly,The biggest problems where integration and its methods of accounting for contracts and how it booked them as future and current profit,I am not sorry to see it go,Its case of classic EGO management and smoke and mirrors accounting,.’

“Amounts recoverable on contracts represent the estimated amounts which have been earned or which valuation, under the terms of the respective contracts, have not yet been agreed with the customers.”

I think what is meant here is slightly more subtle than some seem to think.

So, you’re a building company. Long term projects. So, new punter, sign a ontract with them. The work’s going to take, imagine, four years.

You don’t want to wait four years to get even one tiny little bit of the money. Your new punter isn’t going to give you all the money on day one and then wait four years to get the building done.

So, in your contract you have goals and stage payments. When you’ve achieved goal 1 (say, levelling the gound, digging the foundations and installing the sewers) then you get stage payment 1.

When you do goal 17 (say, installing all the windows and doors, finally making the building weatherproof) you get stage payment 17.

OK, so, how do we all decide that stage 1, 3, 15, 17 have been done and the payment is due?

We bring in a surveyor and he does a valuation.

So, we can have a contract, work done, and payment outstanding, because we’re waiting for the surveyor to come back with the results of his valuation.

(BTW, if people don’t want to pay their bills there is a hell of a lot of playing about which delays the valuation they can do…..and do do).

I don’t for a moment believe that this is the only problem, purely as a guess I would say overtrading. But it’s at least a reasonable explanation for that line plucked from the Guardian report.

Amounts recoverable on contracts represent the estimated amounts which have been earned or which valuation, under the terms of the respective contracts, have not yet been agreed with the customers.

Erm, so the contracts hadn’t been agreed, then? Doesn’t that mean they shouldn’t have shown up in the balance sheet, which was presumably a basis for those bonus calculations?

I think you’ve misread that. Looks like the contracts have been agreed but the valuations haven’t.

In accountancy-world if you have a long-term building contract like this, you recognise income according to how much of the project’s done. So if your independent surveyor says 60% of a £10m project’s been done, you recognise £6m in the accounts – even if not a penny’s been paid up. You just classify it as a debtor.

If any hooky accounting has taken place the directors should have the book thrown at them, but it’s a bit rich to just assume that just because they’re fat cats in pinstripes and something’s happened which you don’t understand, then it must be dodgy.

There has obviously been some dodgy accounting at that firm for some time. From their interim results to a profit warning which knocked 75% of the share price at the beginning of July they appear to have somehow lost 80 million revenue. Moreover, one of the directors sold shares two days before the profit warning. At least those who were paid in equity have lost the lot. I suspect the director who sold will be doing jail time.

* knocked 75% off the share price *

25. gastro george


(what proportion of people are honest? does the proportion of ‘businessmen’ who are honest differ from the population average?)


99% of business people are honest? Well that would fit with the 99% of benefit claimants who are honest too… maybe us lefties have got it right about human nature after all. Hooray!

The point here, surely, is that, even with all things being equal, who has the power to steal significant amounts of money. The same proportions of ordinary people or benefits claimants may be honest, but businessmen have more opportunity. You would think, therefore, that this would been that dishonesty in this area would be a higher priority for the authorities. Which it patently isn’t.

The same applies to businesses and the rich re tax evasion. It makes more sense to crack down on them because of the sums involved, rather than benefits claimants. Indeed employing tax investigators has a remarkable return on investment. I wonder how many will be getting their P45s shortly in the cuts, however.

FWIW, and from my experience of the former, most corporate frauds seem to be like most welfare frauds in terms of motivations behind them. There’s surprisingly few people who set out to do it from pure greed – the initial motivation usually seems to be desperation – ‘my company is about to go bust’ ‘I’m personally broke and need just a few quid to tide me over, I’ll pay it back later’. People do it, the world doesn’t come crashing down round their ears, and they just keep on succumbing until ever larger temptation until, abruptly, it becomes too hard to disguise, and the facade comes crashing down.

(Key differences: the scale is usually bigger, and very few people are ever publicly humiliated for it – staff are almost invariably be fired on the spot with a warning not to expect a reference, on the understanding that they pay it back; company owners will be usually personally wiped out themselves and so there’s no point for the liquidator (the remaining interested party) to spend a fortune in legal fees trying to recover any of the proceeds. It’s usually in everybody concerned’s best interests, sad to say, to let the matter drop.)

The bigger problem is the whole accountancy business is built on a massive conflict of interest. Private accountancy firms rely for their income on the said companies that they are supposed to be checking. Are they going to bite the hand that feeds them?

If they get the contract to carry out the audit, and they release a report that says the company is a hollow shell and the directors have taken all the money they are unlikely to get the contract next year, and they may put off other firms who might use their services. So instead they write a report that is bland and non comitial.

It amazes me that share holders put up with this nonsense.

@gastro george


No surprise that in todays climate, where we absolutely need absolute value for money, an outsourcing company goes bust.
I wonder how much of the tax-payers money from central government really ends up paying for the service required, once everyone inbetween has had their cut:
£1 goes from Government to the council – probably reduces to £0.50p once the Councils overheads are paid – then the £0.50p goes to Connaught – probably reduces to £0.25p once their overheads and profits are paid – they then outsource to an Employment Agency (Connaught use a variety of these) so the £0.25p is probably reduced to around £0.13p once the Agency have had their profit and overheads. I know these figures are estimates, but I’ve worked with big business for many years and know the numbers better than most.
Work it out…. it just can’t continue – too much money ending up in the pockets of a few people before anything actually gets done… you wouldn’t run a corner shop like this, would you????

best messages to take from this:

– Public Services (inc Social/Council Housing) should be run by the Public Sector, not outsourced to private firms.

– The cuts will hit the private sector too, and it still isnt in recovery anyway, so not only will they not pick up the services that are cut, but they wont pick up the jobs either!

essentially, the Tories couldnt be getting it more wrong if they tried, feck I hate the right!

31. Luis Enrique

If you want to argue that outsourcing is bad on the basis that it costs too much, I think you really ought to pin that to a news story about an outsourcing firm making titanic profits, not to a news story about an outsourcing firm going bust because it’s revenues aren’t covering its costs.

[Simon it is just ridiculous to claim that council overheads administering, for example, property maintenance contracts outsourced to a private firm, are 50% of total spending]

Luis – it’s not ridiculous to suggest it, I regret to inform you it is based on detailed knowledge. It’s what I do for a living!!!

33. Luis Enrique


You what? so (hypothetically but reasonably realistically) if a private services company receives £10m annually to maintain a council’s property (which it spends mostly on engineers, office staff, vehicles, materials, parts etc.) you’re saying that the council will be spending £10m to oversee that contract? (hence total spend £20m, council overheads 50% of total spend).

What on earth could the council be spending £10m on? How many council employees, for example, are involved? What do they do? Do they use disposable gold pens and fly helicopters? Please share you detailed knowledge with us! Give us some examples of the annual revenues of some outsourcing firm for some service, then explain why it takes an equal sum to cover the council’s overheads overseeing that contract and what it’s spent on.

Either that’s pure bullshit, or councils are so hilariously, insanely inefficient that every Tory nutter is validated and everything should be privatized.

Simon, if £1 in taxes produces only 13 p in product, doesn’t that rather undermine the idea of paying or anything at all through taxes?

Simon, are you there?

“How many council employees, for example, are involved?”

Probably only one directly – the person responsible for outsourcing and overseeing it. A few others (social services i’d imagine) would have occasional dealings, but nothing like a 50% of total cost. Only in the taxpayers alliance dreams would that one employee cost 10 million.

Ok, a few questions:

1. Is connaught directly responsible for managing social housing? i.e. does it own former council homes (or its own built ones) and let them out to tennents on a non-commercial basis (i.e – less rent than the private sector)?

2. If this is the case, then I would assume it sits on a lot of assets that aren’t being fully commercially exploited. So if it is in administration, does a new buyer have to stick to being a social housing provider? Or could it buy the company on the cheap, and then switch its focus towards pure profit maximisation?

3. If Yes, are there safeguards to ensure the protection of vulnerable people (i.e disabled people who disproportionately live in social housing and are dependant upon specific modifications to the housing), and more generally to prevent current tennants being evicted when rents become moved to commercial terms (something which could raise housing benefit costs)?

4. Are there also procedures in place to ensure former senior management are not involved in any new company that takes over connaught and makes large capital gains or profits as a result of using social housing for commercial purposes?

(see what I am implying here)

Is connaught directly responsible for managing social housing?

I’m not all that sure, I’ve only skimmed their website and so on, but I think they’ve got contracts to service such housing (maintain, upgrade, that sort of thing) but not actually to manage/own.

I certainly could be wrong about that though….

38. Luis Enrique

I’d hope that contracts ensure that properties in private hands but designated as social housing remain so under any change of ownership. Otherwise the council would be stitched up immediately, because you don’t need to go into administration before you change owner

Bankruptcy (or sale) doesn’t invalidate restrctive covenants on land or property either.


It ius a very common mistake mto underestimate internal overheads. Scrutinising performance levels, reviewing invoices,

whoops cut off…reviewing end-user complaints….at least 10-15% of the contract value is going mto be incurred within the council just as overhead

Following up @ 37. According to this morning’s papers they are purely a service company. They have contracts to maintain and manage social housing but do not own it.

Thus the administration will have no effect on ownership of the social housing.

43. Luis Enrique

dioneges. 10-15% != 50%

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