This week, it has come to light that the former auditor of insurance claims processor and digital services group, Quindell, has been fined and reprimanded by the Financial Reporting Council for misconduct.[i]
When Slater and Gordon began to spiral into financial decline, the acquisition of Quindell’s (now Watchstone Group PLC) Professional Services Division, in 2015, was the attributable factor. The loss in value of the company meant shares were ‘almost worthless’ and BC Disease News has reported on the progress of solvent restructure, enacted by new lenders.
Simultaneously, shareholder class action law suits have sought recompense for class member losses and settlements have been reached. On 14 June 2017, S&G issued proceedings on Watchstone, on the basis that ‘… but for fraudulent misrepresentation it would not have entered into the transaction at all’. Subsequently, in edition 204 (here), we reported that Watchstone had filed its legal defence, arguing that S&G had undertaken 5 months of the ‘most rigorous’ due diligence, prior to finalising the £637 million transaction.
AIM-listed Quindell first entered the legal market in January 2012, when it acquired claimant PI firm, Silverbeck Rymer, for £19.3 million and 120.8 million shares. Quindell’s turnover, recorded in 2011, was around £12.5 million. Two years later, Quindell’s share price fell by 28%, which spelled the beginning of financial problems, before the legal business was sold to S&G[ii].
In August of 2015, the Financial Reporting Council began investigations into Arrandco Audit Ltd ((formerly RSM Tenon Audit Ltd).
Results of this investigation have unearthed misconduct in financial statements for the period ending 31 December 2011, relating to accounting practices exercised in a reverse acquisition of the investment vehicle, Mission Capital plc and transactions with the claims firm, TMC (Southern) Limited. Both of these were subject to prior year adjustments in the financial statements of Quindell for the financial year ending 31 December 2014. The FRC have said:
‘The admitted acts of misconduct related to two elements of the audits, and included failure to obtain reasonable assurance that the financial statements as a whole were free from material misstatement, failure to obtain sufficient appropriate audit evidence and failure to exercise sufficient professional scepticism’.
As a consequence of the investigation, which was approved by a legal member of an independent tribunal panel on Tuesday, Arrandco have been fined £700,000, while audit engagement partner, Jeremy Filley, was reprimanded and fined £56,000. Both parties admitted to conduct falling significantly short of the reasonable standard expected and failing to act in line with duties of professional competence and due care, enshrined within the fundamental principle of the Institute of Chartered Accountants in England and Wales.
Was it possible that misconduct and prior year adjustments played a part in S&G’s decision to acquire Quindell? Is this the ‘misrepresentation’ which S&G refers to in its claim against Watchstone?
Further investigation into separate parties involved in Quindell’s financial reporting is still ongoing. We will continue to update our readers on any further developments in due course.
[i] John Hyde, ‘Quindell's former auditors fined £750k for misconduct’ (23 January 2018 Law Gazette) <https://www.lawgazette.co.uk/news/quindells-former-auditors-fined-750k-for-misconduct/5064493.article> accessed 24 January 2018.
[ii] John Hyde, ‘Quindell tries to calm investors after shares slide’ (6 May 2013 Law Gazette) <https://www.lawgazette.co.uk/news/quindell-tries-to-calm-investors-after-shares-slide/70769.article> accessed 24 January 2018.