ISG, a prominent player in the construction industry, has filed for administration with estimated liabilities nearing £1 billion, according to recent documents revealed at Companies House.

Director estimates indicate that ISG’s financial troubles culminated in September, with debts amounting to £981 million owed to various creditors. At the time of its downfall, the company was managing several public sector contracts worth more than £1 billion, including projects related to schools and prisons.

Out of ISG’s total debts, approximately £615 million is owed to “third-party creditors,” mainly consisting of suppliers and small contractors struggling to maintain their businesses. Additionally, the company owes £90 million to HM Revenue & Customs, while £270 million consists of inter-company loans.

ISG’s directors have assessed the total “realisable value” of its assets at only £35 million. This figure indicates that the creditors, including tax authorities who are prioritized for repayment, are likely to recover merely a small fraction of the money owed. The firm, known for its involvement in projects like the upgrades at Lord’s Cricket Ground and the London Olympic velodrome in 2012, has appointed Ernst & Young (EY) as its administrator.

The failure of ISG marks the most significant collapse in the construction sector since Carillion, which faced a staggering £7 billion in debts in 2018, causing major disruptions throughout its supply chain and instigating calls for significant changes in the auditing industry after critical failures were identified in KPMG’s audit of Carillion.

In the wake of that disaster, government officials pledged to establish a new regulatory body responsible for overseeing auditing processes and empowering scrutiny over company directors. However, successive administrations have postponed audit reforms, and the proposed changes have yet to be enacted.

The new Labour administration has announced plans to create an enhanced audit regulator with the authority to better monitor the audits of privately owned companies, including ISG.

Liam Byrne, a Labour MP and chair of the business select committee, remarked that ISG’s collapse underscores the urgent need for reform within the British audit sector. He stated, “Our committee will ensure that the forthcoming Audit Reform and Corporate Governance Bill is effective, learning crucial lessons from ISG’s downfall.”

ISG’s external auditor, MHA, has reported delays in finalizing its 2023 audit due to concerns regarding the company’s viability.

In a related context, the Chartered Institute of Internal Auditors (CIIA), which represents approximately 10,000 internal auditors, has reached out to Byrne and Jonathan Reynolds, the business secretary, urging an examination of ISG’s internal governance frameworks leading up to its collapse. The CIIA has expressed worries over the inadequacies and independence of ISG’s internal audit mechanisms.

Internal audit functions are designed to assess business risks and typically communicate findings to an audit committee, which then informs the board regarding the company’s condition. Various sectors, such as banking, are mandated to uphold internal audit processes, while construction firms are allowed discretion in their risk management practices.

At the time of its failure, ISG lacked an audit committee. In 2022, the company rebranded its internal audit function as the “business assurance” unit, asserting that it conducted internal auditing duties effectively and independently. This unit reported to a risk committee, distinct from an audit committee. ISG was also subject to external audits.

There has been no indication that ISG violated reporting regulations, nor have its administrators suggested deficiencies in its internal audit arrangements, as MHA conducted the external audit.

The CIIA advocates that best practices dictate that a company of ISG’s scale should maintain a dedicated, independent internal audit function alongside an audit committee. They also express concerns that five additional construction firms involved in public infrastructure projects may similarly lack adequate internal audit structures.