Misconduct cases bring UK insolvency ‘wild west’ into focus

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The UK’s big accounting firms have become used to criticism of the quality of their audits. But a recent high-profile misconduct finding has focused attention on another battle to hold advisers to account.

Deloitte and two of its former partners were fined a record £1m last year for failing to ensure there was no conflict of interest when they acted as administrators to collapsed electricals chain Comet Group.

That penalty was dwarfed by the £13.5m fine announced this month for KPMG and one of its former partners for helping private equity group HIG force the insolvency of mattress company Silentnight, in order to jettison its £100m pension scheme burden before it bought the business.

The cases throw a spotlight on the wider restructuring industry, which includes an array of independent firms as well as the Big Four accounting groups and their smaller rivals.

With advisers hoping for a surge in work after the government withdraws pandemic business support, some in the industry say that culture is one of its problems.

“In all of the accounting firms the restructuring teams are the wide boys and girls,” said a senior auditor at a large UK firm. “Auditors and accountants are saints by comparison.”

Many firms see their insolvency departments as a “wild west” in how they approach potential conflicts, the auditor said. “Accounting firms look at some of the behaviours and wince,” he said.

Chart showing the number of company insolvencies in England and Wales

KPMG and Deloitte both sold their UK restructuring practices this year, partly because of increasing restrictions on taking on work from audit clients.

The independence of the administrators or liquidators of a collapsed company is important because they are tasked with recovering money for creditors, including lenders, suppliers and pensioners.

Prior relationships with banks or other lenders to a collapsed company could create a conflict of interest if the insolvency practitioner has a particular interest in pleasing one creditor in the hope of winning further work.

In the Silentnight case, members of the company’s 1,200-person pension scheme were left facing cuts to their retirement income after KPMG facilitated a transaction that allowed HIG, a creditor of Silentnight that KPMG was nurturing as a client, to take over the company without the burden of the pension liabilities.

Another cause for concern is situations where a firm advises a company before it files for insolvency and is later appointed to work on its administration or liquidation.

Grant Thornton was appointed last year as “conflict administrator” over a sister company of Lendy, the collapsed peer-to-peer lender, to independently oversee aspects of Lendy’s insolvency involving the sister company, including where RSM, Lendy’s administrator, might have a conflict of interest.

Grant Thornton did not disclose at the time that it had previously advised Lendy’s board on how to structure its business, people briefed on the matter told the Financial Times. This only came to light when people working on the administration found papers relating to Grant Thornton’s previous advice, they said.

“The big issue with Lendy is the structure and the failings of the structure,” one of the people said. “As conflict administrator, potentially there’s a self-review threat that [Grant Thornton] will be reviewing working papers prepared by Grant Thornton,” the person said, adding that they thought the firm should have at least disclosed its previous involvement at Lendy.

Grant Thornton said it had robust procedures to identify and assess potential conflicts of interest before any client engagement is started and always follows regulatory and ethical guidelines.

Before accepting the appointment the firm “gave careful consideration to the industry’s code of ethics . . . and satisfied ourselves that there is no threat to our independence as a result of any prior relationships”, it added.

While bankers, accountants and auditors have faced tougher oversight in recent years, the insolvency sector remains largely self-regulated.

“We’ve seen [self-regulation] fail time and time again in other different sectors,” said Kevin Hollinrake, a Conservative party MP.

Hollinrake is co-chair of a cross-party parliamentary group investigating standards in the insolvency profession that is due to report its findings next month.

The Silentnight case was a rare one where the Financial Reporting Council brought proceedings against KPMG, but this is no longer possible for insolvency cases following a rule change this year.

Standards are generally enforced by four professional bodies, including the Institute of Chartered Accountants in England and Wales (ICAEW) and the Insolvency Practitioners Association, that both represent and regulate the industry.

The professional bodies say their regulatory divisions, which are monitored by the government’s Insolvency Service, are independent. The Deloitte-Comet case was an example of strong enforcement action by the ICAEW.

R3, an insolvency industry group, told the cross-party group in a letter that the regulatory framework “is robust, effective and transparent”.

The group of MPs has nonetheless called for a more rigorous independent regulator for the industry, arguing that the Silentnight scandal showed insolvency “can be used not as a process of last resort, but as a tool of control that allows for profiteering at the expense of the weaker stakeholders”.

In a separate letter to the cross-party group last month, seen by the FT, the ICAEW denied it was less rigorous than the FRC in its enforcement but that the FRC had more power to bring a wider range of complaints against insolvency practitioners and impose stiffer sanctions.

Instead of licensing individual insolvency practitioners, regulation and enforcement should focus primarily on firms, similar to in the audit sector, it added. The consequence would be much heftier fines for wrongdoing.

That could prove a powerful motivator for any insolvency adviser who is tempted to put profit before ethics.

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