What's up guys and welcome back to wall street millennial on this channel, we cover everything related to stocks and investing we like to think of large corporate accounting frauds as a thing of the past, with the damage that enron, worldcom and countless other firms did over the Years, you'd think that regulators and auditors would learn their lessons and prevent similar scams from happening again, but greed is ingrained in human nature. The motivation of corporate executives to manipulate accounts to line their own pockets will never be extinguished in today's video we're looking at corileon, which, up until 2018, was the second largest construction company in the uk, with 43 000 employees and 5 billion pounds in annual revenue. Unfortunately, the company's success was built on a mountain of deception when their fraud was finally exposed. The stock price fell to zero and thousands of employees were laid off in this video.

We'll look at how karelion became the enron of britain in the late 1990s. The uk government undertook a large privatization initiative whereby previously government-run services were outsourced to the private sector. This created a massive opportunity for private companies to build and maintain train stations, hospitals, prisons and school buildings. One of the biggest beneficiaries was corellion whose primary business was the design and construction of large government infrastructure projects by the mid-2010s.

They had grown into a multinational behemoth with 43 000 employees across the uk, canada and the middle east fueled by both acquisitions and organic growth. Gerillion's revenue increased rapidly in the years leading up to the financial crisis. After 2009, their revenue decreased substantially, but over the subsequent years they had mostly recovered impressively. They reported positive net profit every single year, even during the recession to fund their acquisitions.

They took on hundreds of millions of pounds worth of debt while debt is risky in general, it looked fine for corileon because their profits were so consistent. Investors viewed kuruleon as a very safe and stable construction contractor with high quality government contracts, but underneath the hood things weren't quite as good as they seemed to grow their revenue coreleon bid aggressively on building contracts. They undercut their competitors on price and agreed to take on large complex projects that other contractors viewed as too risky. The construction business is inherently risky, especially when you take on fixed price contracts like corileon did.

Building a large project can take years. Delays and cost overruns are very common and with a fixed price contract you don't get compensated for any unanticipated expenses to understand karelian's fraud. We first have to understand how revenue is recognized in the construction industry. Let's say that you won a contract to build a hospital, you'll be paid 100 million pounds upon completion, and you estimate your total cost will be about 80 million pounds at the end of each year.

You recognize revenue based on the percentage of the project completed if, by the end of the second year, you've spent 40 million pounds on construction you're. Halfway done so you recognize half of the purchase price or 50 million pounds of revenue. Importantly, the amount of revenue that you recognize is dependent on the total estimated cost when coreleon first takes on a contract. Their project manager makes an estimate of the total cost and profit margin.

From time to time, the company will conduct an internal review to see if the construction is going along as planned. If there are any unexpected delays or cost overruns, they'll adjust the estimated profit margin downwards and decelerate revenue recognition by the mid-2010s corileon started facing serious problems. At some of their large government projects, if they account for them accurately they'd, be forced to reduce their revenue, recognition and report net losses on their income statements. That would be unacceptable for the senior management team they needed to always report positive profits, so the stock price could keep going up and they could continue to collect their bonuses.

For example, in 2013 they won a 235 million pound contract to build a new hospital. In liverpool, when they first bid for the project, they estimated a three and a half percent profit margin. In 2015, there were delays due to asbestos issues, pushing back the completion date by three months. These delays should decrease the profitability of the project, significantly carilion re-estimated.

The expected profit margin for the hospital, but instead of adjusting it down, they inexplicably adjusted it up five and a half percent in 2016. Things got even worse. They identified that some of the support beams of the buildings were cracked and needed to be repaired at an estimated cost of 20 million pounds. In light of these problems, the project would incur a 12.7 percent loss, senior management overrode this decision and instead adjusted the expected profit down by just one and a half million pounds under their assumption, the project would still be profitable.

Reasonable people can disagree about the cost of construction projects, but when your estimates differ by a factor of more than 10, it gets to a point of absurdity and corileon's estimates always seem to be biased in such a way to be more favorable to their reported profits. In some cases, their questionable revenue recognition began before the first brick was laid. They would often recognize revenue from a project during their negotiating phase before the customer even signed the contract. The result of their manipulations had the effect of always showing net profits, regardless of the operation performance at the construction sites.

Aggressive revenue recognition was only one of their accounting gimmicks. They also understated their liabilities by half a billion pounds by using so-called early payment facilities. The early payment facility is a structure whereby corileon borrows money from a bank or other entity against future expected revenue. For example, let's say they were contracted to build a new train station.

Carilion might receive cash from the customer once the project is complete, but they need to buy materials and equipment beforehand, so they borrow money using the early payment facility. These borrowings should have been classified as borrowings, but they instead classified them as liabilities to other creditors. It was therefore excluded from the calculation of their debt to earnings ratio, which is an important risk metric both for their shareholders and bondholders. They basically made their balance sheet.

Look better than it actually was. There's another accounting benefit of the early payment facility. The cash that they receive is technically considered of cash flow from operating activities. This allowed them to juice their cash flow from operations numbers to match their high reported profits.

In reality, very little of their reported net profits were coming in as cash, because the profits were basically vague, despite the fact that their business was deteriorating and most of their large projects were disasters, they continued to pay out and even increase their dividend. They funded these dividends by borrowing money which is unsustainable in the long run. All of their gimmicks of pulling forward revenues and pushing back losses did nothing to change the operational failures of the construction sites. Corileon's management was simply kicking the can down the road, and on july 10, 2017 the house of cards came crumbling down in a spectacular fashion.

Corileon announced an 845 million pound impairment charge relating to three of its uk government contracts, as well as its development. In the middle east, just a few months earlier, the company published their financial statements, which showed that everything was fine and did not indicate the need for any impairments. The impairment was a culmination of many years of aggressive revenue, recognition, they'd, basically booked 845 million pounds of fake profits over the prior years, and now the chickens were finally coming home to roost. Investors were shocked by this loss and the share price lost 70 percent of its value overnight.

With debts and losses piling up, corileon's senior management team could feel the wall closing in on them. They hired various advisors to come up with a turnaround plan with one of these advisors being morgan stanley. They told morgan stanley that they wanted to buy some time by raising funds with equity issuance morgan stanley told them that their situation was so dire and the market had lost so much confidence in them that any significant equity issuance was impossible. Carillon's senior management team was offended by this bad news and they stopped listening to morgan stanley.

They paid 10 million pounds to almost a dozen advisors, but all this was completely useless, as corellian c-suite refused to listen to any bad news. They delusionally thought that the situation was still salvageable, despite the growing evidence to the contrary by the end of 2017. It was increasingly obvious that korelion was on its last legs, with his share price falling to a few pennies chairman, philip green, sent a desperate letter to the government asking for a 160 million pound bailout. He said that the economic cost of widespread layoffs would be far greater than the cost of the bailout.

The government compared this request to a ransom letter and refused to pay almost immediately after the government rejected the bailout. Curlion ran out of cash and was forced into liquidation. Thousands of employees lost their jobs and thousands of their suppliers and subcontractors were put under severe strain with many of them also declaring bankruptcy. Many of the contracts they were working on, including the massive new liverpool hospital were taken over by the government, but they found so many structural problems with corileon's construction that to this day, it has still not been completed.

Despite the government pouring in hundreds of millions in new funding, even after bankruptcy, kuruleon would leave a strain on the british construction sector for many years to come. In 2020, a train in scotland crashed killing three people. The crash was caused by a faulty drainage system constructed by corileon in 2012.. Corileon changed the original design of the system to save on cost and the results ended up being fatal.

To date, none of krillian's senior management team has been criminally charged for the accounting fraud. They maintained that they did nothing wrong and kept the millions of pounds worth of bonuses that they received over the years. This gave little consolation to the thousands of workers who lost their jobs and investors, who saw billions of pounds evaporate overnight. Alright guys that wraps it up for this video, what do you think about corileon? Do you think anybody should be held criminally liable for this disaster? Let us know in the comments section below, as always.

Thank you so much for watching and we'll see in the next one wall, street millennial signing out.