Rachael Singh looks at how accountancy's tribunal came to calculate the record-breaking fine against Deloitte for its work on collapsed car manufacturer MG Rover
THE FALLOUT from MG Rover’s collapse saw Deloitte handed a record-breaking fine, for incidents which took place some ten years ago. As the fine was £8m more than the previous recorded payout: how did the tribunal decide on such a huge reprimand?
The tribunal was damning of the firm and one partner in particular and used new sanctions guidance – which can now take into account a firm’s size and profitability when calculating a fine – to deliver the £14m penalty.
But, the battle is anything but over. Deloitte has appealed both the fine and the findings of the tribunal. Firm and regulator are set to slug it out all over again.
This case is one of great public interest and emotion, which involves the collapse of UK car manufacturer MG Rover, which resulted in the loss of more than 6,500 jobs. When it entered administration on 8 April 2005 it had losses of nearly £1bn, highlighting the scale of its failure.
Following its collapse the FRC investigated the work of Deloitte and its corporate finance partner Maghsoud Einollahi in advising MG Rover’s owners. Einollahi was sanctioned £250,000 for his role as adviser, although Deloitte picked up that tab.
BMW sold MG Rover (MGRG) in 2005 to a company which later became owned by four entrepreneurs now known as the Phoenix Four – John Towers, Nick Stephenson, John Edwards and Peter Beale.
Following the collapse of the business, an FRC investigation highlighted two particular transactions involving Deloitte and Einollahi in which the reporting watchdog argues their advice led the Phoenix Four to make money for themselves at the expense of MG Rover.
A scathing attack
The tribunal’s report is scathing of Einollahi and the firm in parts, claiming they “placed their own interests ahead of that of the public and compromised their own objectivity”.
One such example cited in the report is Einollahi’s intransigence in negotiating the size of his fee.
“He told us [tribunal] that when asked to do a corporate finance transaction he fixed his fee and was not prepared to be cut down. Having seen and heard Einollahi we have little doubt that his quotation would have been at the top end of the bracket. His pride would not have allowed it to be otherwise and it might be justified.”
Given that the tribunal felt MG Rover was a public interest company it felt Einollahi should have considered the public interest, something he “seems now to accept”, it claimed.
It added there were sub allegations against both parties that, while individually were not as serious, together showed a “persistent disregard of the fundamental principles and statements” of the ICAEW.
“This was a flagrant disregard of the professional standards expected and required and was in each individual case, and of its own, serious misconduct,” the tribunal report said.
The criticism of Deloitte and Einollahi is blistering at times and cuts to the heart of the firm’s integrity. It is that accusation that is perhaps the most damaging – and most hotly contested – as it strikes to the very core of what Deloitte stands for.
“To be portrayed that way, as having a partner and a firm acting in a way that was deliberately dishonest, just isn’t the firm I lead and work for,” David Sproul, Deloitte’s chief executive and senior partner told Accountancy Age in an interview prior to the firm lodging its appeal.
“We strongly believe that we did a good job, had real regard to the public interest in what we did and that the advice we gave was in the best interest of the company, employees and the public.”
As the first case to use the new FRC sanctions guidance, any fine involving a large firm was always likely to be record-breaking, dwarfing the previous record of £1.4m levied against PwC for its audit work at JP Morgan.
There is now no cap on fines and tribunals can take into account a firm’s revenue, profits and fees per partner, in a radical change to sanctions brought in earlier this year.
The FRC called for the tribunal to dish out a fine between £15m and £20m and exclude Einollahi from being a chartered accountant for six years. Deloitte countered that it deserved a fine of £1m and a non-financial reprimand to Einollahi and claimed the publication of the tribunal report and publicity around the case is already a heavy penalty for a major member firm.
However, the tribunal calculated the fine based on the fees made by the firm from two transactions it advised the Phoenix Four on. It also fined Einollahi £250,000 in the hope it would act as a severe deterrent, although it was picked up by Deloitte.
Deloitte has since said it would appeal the tribunal’s findings. There are four grounds for appeal, and Accountancy Age understands Deloitte is contesting all four:
(i) The decision of the Disciplinary Tribunal was perverse or wrong in law
(ii) There was injustice because of a serious procedural or other irregularity in the proceedings before the Disciplinary Tribunal
(iii) Significant and relevant new evidence has come to light which was not previously available to the appellant and could not have become available to him or it on the making of reasonable enquiry;
(iv) The sanction imposed pursuant was manifestly unreasonable.
A statement from Deloitte said: “After careful consideration, we have decided to seek leave to appeal the findings of the MG Rover Tribunal.
“We recognise the general desire to move on from this case but do not agree with the main conclusions of the tribunal which we feel could create significant uncertainty for individual members and member firms of the ICAEW.”
The appeal is with an independent tribunal member, who must decide whether there are grounds for appeal.
The case has taken best part of a decade, but with no deadline on how long the tribunal member can take to reach their decision the end of this landmark case is not yet in sight.