Following the ICAEW’s record fines for Deloitte and two partners who acted as administrators for Comet, Neville Kahn and Christopher Farrington, the FT ran an article delving into what had occurred.
We knew from the institute that the £925,000 fine for Deloitte and fines for Kahn and Farrington (£50,000 and £25,000 respectively) were due to failing to comply with its code of ethics.
Other reports covered an alleged conflict of interest between the administrators and the owners of Comet, a group of investors operating through a structure named Hailey Acquisitions.
The FT’s follow-up article, however, was more illuminating on the topic. It alleged that Kahn had worked alongside Hailey well before the administration process started. This may not seem unusual in a pre-insolvency, but the structure of Hailey’s ownership meant that its secured creditor status ensured it would make a very tidy sum from Comet’s collapse, having risked very little capital itself.
After Hailey called in its loan to Comet, leading to administration, questions were raised about the validity of the deal and the role of Deloitte’s partners in supporting Hailey before and after Comet’s collapse.
Most interestingly, months before Comet’s collapse, the article states that Kahn had lodged a conflict check at Deloitte.
Insolvency practitioners’ professional lives are close to the edge. They work with lenders, funders, directors, lawyers and supply chains. The top IPs are incredibly well-connected and experienced. The potential for conflict is usually close by.
As we’ve seen in audit, the largest firms are questioned over their role in flagging problems (or not) prior to corporate failures, and ultimately to whom they actually serve: is it stakeholders such as investors, or their ‘client’ the board?
Checks and balances are in place for a reason: to ensure fair and equitable outcomes in relation to the behaviour of powerful and influential professionals.
Deloitte states that when the Comet investigation began in 2016, it conducted a thematic review of engagement acceptance procedures, and improved processes in approving insolvency appointments.
An accounting firm’s culture is determined by its goals: be they corporate targets or the impact on people and wider stakeholder community. It is also influenced by the people it hires and the qualifications they undertake, the legal/regulatory landscape, and the desires of their clients.
This is then demonstrated in the little – and big – decisions made within firms on a day-by-day and minute-by-minute basis.
In a world where their role in audit, tax and insolvency have been under the microscope for years, it’s vital that accounting practices’ own governance, procedures and ethical stance dominate their culture.
It isn’t easy for them to illustrate their compliance and robust governance. But the ongoing and consistent number of occasions when firms step too far into issues of conflict (and perceived conflict) – just read any year’s audit quality reviews for example – suggests the problems generally haven’t been solved.
And as we’re seeing with audit reform, if the accountants don’t get their own house in order, someone else will step in to do it for them.
Kevin Reed is engagement and communications consultant at Foulger Underwood