Studying corporate failures provides critical lessons for preparers, auditors, and regulators.

1. CARILLION (UK construction; collapsed January 2018):

Background:

Major UK construction and outsourcing company
15,000+ direct employees; many more in supply chain
Collapsed into liquidation January 2018; major political and regulatory aftermath

What went wrong (reporting):

Aggressive contract accounting: optimistic forecasts of contract profitability; "milestone" recognition without economic substance; unsubstantiated traded claims/variations
Insufficient impairment of contract assets: continued recognising contract profits when contracts were loss-making
Optimistic provisions: under-provided for known issues; "judgement" used to flatter results
Goodwill not impaired despite signs of overvaluation
Cash flow vs profit divergence: red flag — profit growth not matched by cash; supply chain finance disguised true debt level
July 2017 profit warning: £845m write-down (later increased) revealed scale of overstatement

Audit failures:

Lessons:

2. PATISSERIE VALERIE (UK chain; collapsed October 2018):

Background:

What went wrong:

Fraudulent financial statements: revenues and assets overstated; bank balances FICTITIOUS
Bank balances reported did not exist; funds had been moved through unrecorded loans and other arrangements
Suspicious balance sheet items: cash positions inconsistent with cash flow patterns
Inadequate internal controls; CFO at centre of fraud

Audit failures:

Grant Thornton audited Patisserie Valerie
FRC investigation: failed to obtain sufficient appropriate evidence on cash balances
Did not adequately confirm bank balances directly
GT fined £1.3m in 2023; significant reputational damage

Lessons:

3. BHS (UK retailer; collapsed April 2016):

Background:

What went wrong (reporting):

Going concern: question whether accounts properly addressed going concern given deteriorating performance
Related party transactions: payments to Green family entities — aggressive characterisation
Pension deficit reporting: significant deficit but characterisations of recovery plan
Sale to Chappell: question of whether the sale was at arms' length and properly disclosed

Audit failures (PwC):

PwC fined £15m in 2021 — largest UK audit fine to date at that time
Failures including audit of going concern, related parties, sufficient documentation
PwC partner banned for 15 years

Lessons:

Going concern requires robust evidence — particularly for businesses with stress signals
Related party transactions need rigorous independent challenge
Pension deficits significant for retail and other labour-intensive businesses
Audit needs to be more than "compliance" — needs to challenge management
Catalyst for parliamentary inquiry; reputational damage to audit profession

4. WIRECARD (Germany; collapsed June 2020):

Background:

What went wrong:

Fictitious revenues and cash: large parts of business in Asia/Middle East fabricated
Bank balances: confirmations from "trustee" banks in Philippines fabricated; cash didn't exist
Long suspicions: FT investigations from 2015 raised concerns; ignored or attacked
Regulatory failures: BaFin (German regulator) investigated short sellers, not Wirecard

Audit failures (EY):

Lessons:

Cash confirmations must be DIRECT from independent source — never via intermediaries
Tip-offs and external concerns must be taken seriously
Regulators need to investigate the targets, not the messengers
Auditor needs professional scepticism — especially for "too good to be true" growth
Geographic distance is no excuse for not getting evidence

5. ENRON (USA; collapsed 2001) — historical but foundational:

What went wrong:

Off-balance-sheet SPEs: hundreds of "Special Purpose Entities" used to hide debt and inflate profits
Mark-to-market manipulation: aggressive forward valuations of energy contracts; gains recognised before realised
Related party transactions: SPEs run by Enron executives with conflicts
Audit failures (Andersen): Andersen collapsed; Sarbanes-Oxley (SOX) Act 2002 enacted as response

Lessons (and lasting impact):

Common themes across failures:

Aggressive accounting precedes failure — reports look strong while business deteriorates
Audit weaknesses in obtaining sufficient appropriate evidence
Long auditor tenure contributes to familiarity threat
Tone at the top drives reporting culture
Whistleblowers ignored or punished
Regulators slow to act
Cash flow vs profit divergence is typical red flag
Complex structures often hide problems

Implications for accountants today:

Corporate Reporting