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14 Dec 2009
Insolvency practitioners, including IPs from legal and accounting backgrounds, have taken £3bn in fees during the economic downturn according to The Sunday Times and More4 News.
The article claims collapsed companies such as Woolworths, Zavvi and Lehman brothers has made administrators £3bn in the recession - half of the combined Top 50 accountancy firms fee income.
An investigation by More4 News and The Sunday Times found a "magic circle" of ten accountancy and solicitor firms, including PricewaterhouseCoopers, Deloitte and Ernst & Young, made a total of £20bn in fees over the last two years. They estimate £3bn has come from insolvency work.
"This is an enormous extortion racket carried on behind a very opaque screen,” said Austin Mitchell, a Labour member of the Commons public accounts committee.
“Quietly, [these firms] are making themselves very rich,” he added.
The research finds that Deloitte made £10m in fees over the last financial year for its administration work on Waterford Wedgewood, Woolworths and Land of Leather.
PwC earned £154m in fees following its work on collapsed investment bank Lehman Brothers, although they only worked on the European arm. Ernst & Young has been paid £4.2m for its insolvency work on retailer Zavvi.
The article has already caused controversy with comments claiming the story does not have an "even handed view."
"Partners charge more for their time and involvement because of the value of their experience and knowledge," claimed D Petersen, a commenter on the story.
"But what should also be known is that they actually only charge roughly 10% of their time because they are more concerned about selling and developing their services. So these claims by the Times are a little skewed to promote outrage and make a good story," he added.
Stephen Hunt, of Griffin which investigates insolvency practitioners, said: "I suspect many creditors are unable to distinguish between a good or bad IP as they take very little interest once a debtor has gone bust. Unless and until they do it is unreasonable in my view to entirely blame the IP."
Further details of the story will be shown on More4 News tonight at 8pm.
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The Insolvency Debate
As many will know, over the last decade or so I have been involved in a number of high profile (and not so well-known thanks to tomlin orders) cases involving the misconduct of insolvency practitioners. This work has led me to examine in great detail areas of our work and legislation that most of us do not consider. There are a number of areas that we as a profession need to address before they are addressed for us.
1. Unlimited time resolutions. These do not exist in any other trade or profession and will not last. It also causes IP's to slip into bad habits by not maintaining a relationship with those in whose interest they act. It is not enough to say that we do a good job or that sometimes we do not get paid in full. Our reputation is damaged by the way in which our interest in the creditors wanes the moment that they have agreed the resolution. In my view a resolution out to carry a monetary limit to be valid. Once the limit was reached then the IP ought to be forced to seek a further resolution.
2. Insurance and Bond claims. In all bar one case I have dealt with in the last decade, whether the IP had PII cover was a major issue. PII insurers drop their client the moment a claim comes in and often I have played a minor role it what becomes a major battle between IP and insurer. Aside from the acute distress that this causes the IP who thought he was covered, this is not a satisfactory way to protect the public. Similarly bond cover creates the illusion of protection from fraud but this is far from the case. The value of a general bond has not increased in 23 years and should be in excess of £5m to be fit for purpose. Equally the rules for setting a bond and ensuring a bond is taken out simply do not consider what happens when a claim is made. This lack of protection puts our status as a profession in grave danger.
3. Regulation. It was shocking to me when I realised the limitations that our regulators have to work under. Our work in dealing with legal issues, ethics and handling funds is close to a specialist lawyer than an accountant, yet our regulation is based on accountancy principles. It is a simple fact that we should be regulated as if we were lawyers with the same levels of inspection and with the power for regulators to intervene to protect the public?s funds that we hold. Our regulators don?t even have the power to appoint a new officeholder if they take away the licence of a delinquent IP.
4. Education. The original intention of the examination process was to ensure a minimum level of qualification of IPs. In formulating the exams it appears that it is envisaged that the candidates would already be qualified in law or accountancy but there is no requirement for this to be the case. As a result it is possible to just sit three 3-hour papers and become an IP. An IP may have fewer qualifications than a junior accountant and yet can take on difficult work with a minimum of experience. We need to consider examinations structures over years where every aspect of ethics, accountancy and law is tested. If the candidate is already qualified then some papers might be opted out, but this should be our minimum.
Posted by: Stephen Hunt, 14 Dec 2009 | 00:00
Worse than estate agents
For once I agree with Austin Mitchell. IP's are a rip off and I cannot see the point of them. I have never known any payments to come from an insolvency after they have had their share. And don't get me started on the charge rates for a secretary to do photocopying...
Posted by: Ex sole practitioner, 14 Dec 2009 | 00:00