As soon as Mowlem’s accounting difficulties hit the news last month the race was on to find the person responsible. Building reports on the unseemly row between the past three chief executives over their financial problems and the impact they have had on the company …

The unseemly row between the past three chief executives over their financial problems and the impact they have had on the company …

The unseemly row between the past three chief executives over their financial problems and the impact they have had on the company …

The latest industry joke among middle management at the moment is: “How many CVs from Mowlem staff have you received this week?”

Many contractors are taking this as a sign that the problems at Mowlem have not fully abated, despite axing 200 staff in May and last month announcing an interim pre-tax loss of £73.4m. The talk in the industry is that staff are moving because they are fearful for the future.

And, despite the efforts of management to assure the City that the company has been brought back on track by a series of accounting changes, the blame game seems to have begun.

Last week, chief executive Simon Vivian made thinly veiled criticisms of the company’s former management team including his predecessor Sir John Gains and the finance director Gerry Brown. He also said he will close down or sell-off up to six loss-making businesses.

To those who have been in the building game for at least 10 years this might all sound a bit familiar. It should: just months into his reign in 1996, Gains attacked John Marshall, his immediate predecessor at Mowlem, by saying that the strength of the group’s construction business was not reflected in its poor financial results. He then sold off or downsized loss-making businesses in the construction and engineering divisions. Marshall bit back the following year, branding proposals to float Mowlem’s scaffolding business SBG as a “disgrace” and “unnecessarily expensive”.

History might have repeated itself, but if Gains has any regrets over his tenure he hides them well. He interrupted a holiday in Portugal last week to tell Building: “I had nine great years as chief executive. We had consistent profit, transformed the scale of Mowlem, built up the services businesses to run alongside construction without any write-downs, had an improved safety record and took the share price from 53p to more than £2 at its peak.”

But many would argue that the company’s present troubles are the result of the aggressive recognition of profits and failure to make write-downs, both of which took place during Gains’ watch. As one disgruntled former employee put it: “If people think you’re doing a shit job you don’t get to stay as chief executive for nine years. But we knew the problems were desperate. It was across the range of businesses – the PFI division had a problem with schools.”

Two weeks ago Building reported on Mowlem’s education contract in Exeter, where at least four out of the city’s six new schools will be delayed by nearly six months. This is one of about 80 contracts that Vivian and his recently installed finance director, Paul Mainwaring, have had to make adjustments to. Some argue that increases in pre-tax profit didn’t seem to be converting into money in the bank. For example, in 2004 it reported a net cash increase of £3.9m despite a pre-tax profit jump of £12.1m – although Mowlem could argue that this was channelled into acquisitions or repaying bank debt.

We knew the problems were desperate. It was across the range of businesses

Mowlem employee

But the accounts were muddied by different accounting strategies across Mowlem. There was little central control, so different managers recognised profit at different stages of the contract. The profit would be accounted, yet the project might not be as profitable as first hoped, or contract delays or disputes might arise piling on costs to the contract. So the profit being chalked up in the books might not always materialise.

When Vivian took over as chief executive at the start of the year he reviewed the group and decided to swallow the bitter pill: the company would have to revise the way it recognised profit and valued contracts on its balance sheets. Vivian wants to account for profit fairly late in a contract's life – a more conservative and prudent accounting position.

Brown, the then-finance director, seemed to be feeling the pressure of these accounting changes in his last City results meeting in March, when he shocked analysts with an extraordinary outburst. Brown had been stung by reports suggesting that his departure was linked to accounting issues. He said such claims were "unjust" while onlookers were said to be staring at their shoes in embarrassment.

The problem with Vivian’s changes was that it led to profit warnings, and that pushed the share price to a year-low of 130p. The pressures of the City are such that failure to report year-on-year profit increases can hit corporate reputations. This makes it tempting for a company to present itself in the best light possible, but arguably not in the most accurate way. Eventually the problems will emerge, though, leading to an even bigger hit on the shares as the scale of the contractor’s problems is realised.

However, the suspicion now is that Vivian might have actually written off too much, and even have up to £10-20m extra in profit to come back after lowering expectations on certain contracts. This ultra-conservative approach means that he might be able to impress the City with better-than-expected results next time around, or it will at least help the company to absorb any additional contract hits.

Although Vivian’s tenure has had to take the opprobrium for admitting the company’s problems, his own reputation is soaring. The City see him as someone who plays it straight, and this should help steady the share price, if not help it to rise to the £2 mark. As Andy Brown, a construction analyst at Arbuthnot, puts it: “The management team has restored credibility to Mowlem. The bottom line is that we don’t really know what other problems there might be just from the accounts, but at last we have got a team that is aware of operational and stock market issues.”

To be fair to Gains, his supporters point out that he was tough enough to issue the first profit warning in 2004, a brave decision as it sullied what had otherwise been an impressive reign. But Vivian would not be the first chief executive to have doubts about his predecessor.

Disasters Downunder: Mowlem’s Australian operations

The first signs of problems for Mowlem came in June 2004, when it announced that it would take a £12m hit on its Australian business because of losses on housing contracts in New South Wales.

By the time Sir John Gains’ retirement was announced in September, successor Simon Vivian had already flown to Australia to check out its operations there.

Further problems emerged in Australia in February this year, after Mowlem told the City that it was producing lower than expected revenues on its Alice-to-Darwin rail project. It required a cash injection of £4m. Mowlem’s response to its disappointments in the Antipodes has been to reduce its exposure to the building market and focus on rail and infrastructure work.

Making it all add up: Mowlem’s balance sheet

Accounting for contracts is a subjective exercise and this has caused problems for Mowlem. It is now using “add to value”. This accounts for any variations, claims and extras it expects to invoice for on top of what was originally agreed. Until recently, there was a lack of financial control so that many people running contracts would estimate what extras they expected to get, but were overoptimistic, leading to inaccuracies and write-downs.

There is a more formal way to make these estimates. Any contract of less than £1m is not put in to “add to value” until it is virtually completed. Extras for contracts worth between £1m and £5m will not be accounted for until the contract is close to completion. Any project worth more than £5m will be reviewed by management to assess how much should be put in the add-to-value accounting line.

Anything held in “add to value” for longer than 18 months must be reviewed by management to assess whether it is recoverable or not and therefore written off.