The fine – which came with a ‘severe reprimand’ (Deloitte must be quaking in its boots) – is by far the largest handed out to an accountancy firm by the Financial Reporting Council (the next-largest was £1.4m, given to PwC in January 2012 for its audit work of JP Morgan).
On top of that, a former partner, Maghsoud Einollahi, was fined £250,000 and excluded from the accountancy profession for three years. Although he has reportedly retired, so we doubt that’s his biggest worry...
The fine is related to the ‘Phoenix Four’, a group of four directors – Peter Beale, Nick Stephenson, John Towers and John Edwards – who bought MG Rover for £10 from BMW in 2000.
In 2011, it was uncovered that they had taken a combined £42m in pay and pension benefits out of the company in 2005, just as the company was collapsing with £1.3bn of debt, and 6,000 jobs were being lost. Not surprisingly, the four were struck off – but the FRC had questions about Deloitte’s conduct during the affair.
The FRC’s 13 allegations against Deloitte include ‘failing to consider the public interest as corporate advisers to the Phoenix Four’, ‘failing to put in place safeguards between MG Rover Group and the Phoenix Four’ and ‘holding themselves out as advising MG Rover Group when in fact they were advising the Phoenix Four’.
In short, it said the company and Einollahi ‘fell short of the standards reasonably expected of… a member firm of the Institute of Chartered Accountants in England and Wales’. An independent tribunal agreed.
But Deloitte has protested in no uncertain terms. Today, a spokesperson said that the company is ‘disappointed that the efforts we… made did not successfully secure the long-term future of the MG Rover Group.
‘The quality of our work… has not been criticised, but the tribunal found against us on a number of points. This could have negative implications for the advice that can be provided by ICAEW member firms… both within the profession and business.’
It’s arguable that this is what happens when just four large financial advisory firms serve the majority of companies in the UK (90% of listed companies). In July, the Competition Commission scrapped plans to force listed firms to switch auditors every few years, instead settling with making them put their audit work out to tender every five years. Which means there’s a good chance that this sort of thing will keep happening.
Still: fortunately for Deloitte, despite the fine’s record-breaking nature, it should be able to find the money. The firm announced revenues of $31.3bn (£19.9bn) last year, so it should be able to find something for the FRC down the back of the sofa. Phew.