Connaught's 42m black hole
Published:  16 December, 2010

EXETER: Collapsed social housing firm Connaught has a 42m black hole in its accounts that its new owners are unlikely to recover, while Morgan Sindall and Mears buy up its contracts.

Building magazine cites two sources close to the administration of the 400m-turnover firm saying its social housing arm had 94.3m worth of work-in-progress but administrator KPMG deemed 42.4m irrecoverable.

Last week, following the company's collapse into administration on 7 September, Morgan Sindall bought about 100 of Connaught's social housing contracts for 28m, representing about 80% of the business by turnover and worth an estimated 200m per year. That was followed by a deal with rival Mears, which picked up eight contracts for a nominal sum.

One source said: "The issue was that Connaught booked a lot of turnover and profit it expected to get over the lifetime of a contract irrespective of whether it had received it. It would often win work at low prices and then try to add revenue through extras once the deal had started, which it would book but which clients were not always willing to pay."

Another source that looked through Connaught's books backed up the figures, saying: "It was overestimating the amount of work it would win. I had suspected it was bad but what I saw shook me."

Recognising future revenue does not breach accounting practices, but analysts have said it is a question of the degree to which it is appropriate.

Guy Hewett, an analyst at Investec, said: "A large unrecoverable work-in-progress balance would fit with the aggressive accounting for costs, which our research has highlighted, and potentially significantly overstating revenue."

Connaught's figures were further flattered by a policy of spreading upfront contract mobilisation costs over the lifetime of a deal rather than taking them as a one-off cost at the start. Both sources said the accounts were further skewed by a policy of taking a flat mobilisation cost of 1.75% for all contracts irrespective of their size or complexity.

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