Carillion Bankruptcy Exposes Increasingly Popular Accounting Flaw

A financial reporting loophole was evident in the January bankruptcy of Carillion PLC, according to a report from Moody’s Investor Service. To the outside world, the company appeared to be a reasonably healthy concern, but what lies beneath the company’s balance sheet was a “reverse factoring” mess that obfuscated its true liabilities to banks. What is being categorized as an accounting flaw is becoming an increasingly popular method of financial engineering.

In 2016 Carillion’s balance sheet pointed to bank loans and overdrafts that amounted to £148 million ($206 million). What was not as clear was that the construction concern had additional...