Accountancy firms have rightly faced scrutiny for failing to spot red flags that led to a wave of UK corporate collapses, from Carillion to Thomas Cook. Sweeping audit reforms are supposedly in train. Yet one area of the firms’ business still seems vulnerable to cowboys: insolvency. One partner said auditors and accountants were “saints by comparison”. The mind boggles.
A parliamentary inquiry’s chair came to the same conclusion, highlighting a “wild west” rife with conflicts, where insolvency practitioners can wield great powers, such as seizing assets, with little consequence if they abuse those powers. With a wave of pandemic-related insolvencies predicted, there must be an urgent overhaul.
This week, a tribunal revealed its findings into the Silentnight case, brought by the Financial Reporting Council. KPMG already earned a £13m fine over the episode, and a restructuring partner £500,000. The tribunal’s reasoning makes for shocking reading: the firm helped push Silentnight into insolvency in 2011, allowing a private equity firm that KPMG was courting as a client, HIG Capital, to buy the company without the burden of its £100m pension scheme. The twist to the tale is that HIG bought KPMG’s insolvency arm this year, with firms under wider pressure to root out conflicts. Deloitte has also sold its insolvency unit.
The case underscores an industry requiring reform. Practitioners must serve many interests that may not align, from those of the troubled company, to creditors, to the state, to shareholders. The parliamentary inquiry found differing interests are not always appropriately managed.
The main problem arises because it tends to be a company’s secured creditors — often a high-street bank — that direct a practitioner’s appointment, normally in secretive circumstances. This is despite the practitioner usually being paid from proceeds recovered from the company. Compounding the issue is banks’ use of “panels” of practitioners, who, in return for steady work, sign up to commitments covering everything from hourly rates to pledges not to litigate against the banks, the inquiry found.
Potential conflicts extend to insolvency practitioners’ oversight. The government’s Insolvency Service outsources regulation to professional bodies such as the Institute of Chartered Accountants in England and Wales, to which practitioners pay membership fees. These bodies’ dual duty, to both police and represent members, is undesirable. In other professions, like law, these duties have long been split. Moreover, these bodies only have limited powers as they oversee individuals, not firms, leading to derisory penalties. The meaty Silentnight fines are unusual in insolvency and, due to an FRC rule change, will probably not be repeated.
The ICAEW argues that firms should be licensed for insolvency work, with partners then approved to undertake appointments, as is the case for audit. This would increase bodies’ fining powers. This certainly makes sense.
More radically, as proposed by the parliamentary report, there should be an independent regulator with serious fining powers. That could be the FRC, or its replacement, dubbed Arga. But there is a regrettable delay in implementing Arga and it already has a long to-do list. A watchdog could be brought within the Insolvency Service, although that would go against the convention of making regulators independent of government. After a consultation in 2019, the service gained the power to create an independent watchdog. That power lapses in 2022 and is yet to be exercised. Meanwhile, the wild west of insolvency remains without a sheriff.
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