Downer EDI's 'systemic' contract corruption halved its market value in a year

When project engineer Aidan Cox sat in the witness box at a NSW Independent Commission Against Corruption hearing in March 2023, he dobbed in one of Australia's dullest but most civically important listed companies, Downer EDI, for a corruption problem he judged 'systemic'. About a dozen individuals, including at least six former Downer staff, stand accused by ICAC of rigging contracts, inflating bids, fraud, bribery and kickbacks across NSW government rail maintenance contracts awarded to Downer — and by Downer to its subcontractors.

The hearings laid bare what Grant Thornton forensic partner Chris Watson called the classic enabler: 'poor controls or lack of oversight of those controls.' In examples ICAC outlined, subcontractors lined their pockets by inflating prices on government contracts — while Downer itself lost money on them. The company failed to spot the behaviour 'under some of its top executives' noses'.

The corruption disclosures landed on top of an accounting scandal. In December 2022 Downer revealed 'accounting irregularities' in a power maintenance contract, feared to have overstated profits by up to $40 million; by February the external investigation put the overstatement at $22.2 million across April 2020 to June 2022, management insisting the misreporting was specific to that contract. Weeks later ICAC revealed problems in rail contracts dating from 2014 to 2020. Two profit downgrades in three months followed; shares nearly halved in a year, cutting market cap to $2.3 billion.

Controls over subcontractors were weak enough that bid rigging and inflated invoices ran for years on government contracts Downer held.

The company lost money on contracts its subcontractors profited from — evidence that neither pricing nor invoice verification was working.

The accounting irregularity was presented as an isolated incident in February 2023; within weeks ICAC showed conduct problems stretching back to 2014.

Outsourced delivery without oversight of the outsourcers is a control failure: when subcontractors profit on your money-losing contracts, the fraud is upstream of your own P&L.

Shareholders demanded change: the chairman retired, the CFO resigned, two directors departed, and staff under ICAC investigation exited. CEO Grant Fenn, 12 and a half years in the job, stepped down in February 2023, succeeded by COO Peter Tompkins — who as company secretary and general counsel had handled the 2016 settlement of the class action over the $3 billion Waratah train project, known internally to be 12 months late and $117 million over budget long before the market was told. Tompkins began cost cuts, as Queensland named Downer preferred supplier for its $7 billion train program.