End game looms for Deloitte’s MG Rover £14m spat with the FRC

DELOITTE has scored a minor victory against the UK’s accountancy watchdog after it successfully overturned a number of charges in its appeal over the record £14m fine levied against the firm by the FRC for its controversial role at MG Rover, which collapsed in 2005 with the loss of 6,000 jobs.

The appeal tribunal today rubber stamped the appeal by the Big Four firm and its now retired partner, Magshoud Einollahi, who was cleared of eight counts of deliberate professional misconduct charges. It also overturned the charge that Deloitte acted against the public interest.

The ICAEW has also been dragged into the dispute after the tribunal criticised the institute for the lack of clarity in it’s guidance about how accountants should act in the public interest.

It also rejected the finding that the firm’s contingent fees on Project Platinum – for which it received £7.5m – and Project Aircraft, for which it secured £1.9m plus VAT, were excessive and unjustified.A spokesman for Deloitte UK said the firm was “pleased” that findings of failing adequately to consider the public interest and deliberate serious misconduct were overturned.

“We take such responsibilities extremely seriously and these findings were entirely unreflective of the integrity and values of our firm,” said the spokesman in a statement. “However, we accept the tribunal’s findings that aspects of our client engagement processes could have been better.”

Conflict of interest

But it didn’t all go Deloitte’s way, as the Sir Stanley Burnton-chaired panel upheld five charges of failing to account for conflict of interest.

Paul George, executive director, conduct, at the FRC, said: “The FRC welcomes the Appeal Tribunal’s decision that there were some significant issues of misconduct in this case concerning the need for accountants to act with objectivity. Firms should identify who the client is at as early a stage as possible so that any conflicts of interests can be addressed.”

All the findings in relation to the Project Aircraft scheme were quashed. Project Aircraft was designed to generate returns on tax losses incurred by MG Rover, which could be offset against profits made elsewhere in the company.

The Phoenix Four – a quartet of businessmen who led the purchase of MG Rover from BMW prior to its collapse – used the tax losses from MG Rover for their own company in which MG Rover had no interest. The four individuals – John Towers, Nick Stephenson, John Edwards and Peter Bealehad – decided that they personally should be HBOS’s joint venture partner in this transaction as opposed to a company in the MG Rover group.

Five charges against Deloitte relating to Project Platinum were upheld. Project Platinum related to the purchase of BMW’s loan book or amounts due to MG Rover under existing finance contracts from customers who had bought vehicles.

BMW originally planned to sell the loan book directly to MG Rover – which had £41m in an account as collateral. The Phoenix Four instead bought the loan book and sought to keep the profits for themselves.

Aircraft’s modus operandi effectively worked by generating returns from MG Rover’s tax losses which were then moved to a company indirectly controlled by the Phoenix Four and enabling substantial payments to be made for their own benefit.

The Phoenix Four paid themselves and MD Kevin Howe £42m before the manufacturer was plunged into administration with £1.4bn in debts five years later.

Fees and fines

While today’s ruling marks a clear line in the sand for both parties on this case, finally putting it to bed after nearly ten years of bitter wrangling, what is still being fought out are the details of just how much of the firm’s £14m and Einollahi’s £250,000 fines will be slashed by.

Deloitte billed more than £30m in fees for working on the doomed car manufacturer between 2000 and 2005.

The £14m fine dwarfs the previous highest FRC fine of £1.4m slapped on PwC in 2011 over its JP Morgan Securities audit.

The accounting and audit profession’s watchdog accused Deloitte and Einollahi as acting as advisers to companies related to MG Rover and the Phoenix Four while the Big Four player also acted as the car manufacturer’s auditor.

The FRC also accused Deloitte of trying to appear that it was advising MG Rover when in reality it was advising the Phoenix Four, who were banned from being company directors for a combined total of 19 years.

The former Longbridge site in Oxford is now being redeveloped for housing and a retail park.

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