Q: who audits the auditors? A: their pals

“The chief accountancy watchdog has hired lawyers to keep evidence confidential that might throw light on its contentious decision in 2013 not to investigate KPMG’s audit of HBOS.

Four of the auditor’s former partners were serving on the Financial Reporting Council’s conduct committee when it decided not to investigate their former firm’s role in the bank’s collapse. Another committee member had advised KPMG previously.

The FRC, which last week emphasised the importance of transparency in its workings, has appointed Fieldfisher, a law firm, to fight a tribunal appeal aimed at winning access to documents and emails under the Freedom of Information Act.

The regulator is under pressure to improve its investigatory processes after several corporate collapses where the auditors failed to spot problems. Last week Greg Clark, the business secretary, promised an independent investigation into the regulator.

Some concerned investors say that the FRC is soft on auditors because it has been “captured” by the accounting profession, with its board and decision-making committees liberally sprinkled with former Big Four accountants.

MPs described the regulator’s initial decision not to investigate KPMG as “a serious mistake”. Poor accounting and accounting rules have been cited as one reason why no one understood how bad the bank’s problems were until it was too late. The bank was rescued by Lloyds TSB with £20 billion of backing from taxpayers. Later £53 billion of its loans went sour as the extent of its reckless approach to creditors became clear.

The FRC belatedly investigated, only to find the auditor not guilty of any serious failings — triggering more astonishment from some MPs.

Margot Gibbs, a researcher originally backed by Greenpeace, is appealing against a decision by the Information Commissioner in November in order to establish how individual members of the conduct committee voted and whether there was any lobbying between KPMG partners and their former colleagues and advisers on the committee.

She also wants to challenge the FRC claim that, despite being a public body, it is largely exempt from the Freedom of Information Act. The watchdog and the business department, its sponsoring ministry, have been fighting the public sector classification for 14 years.

The former KPMG partners on the ten-member conduct committee were Paul George, a partner until 1999, Sean Collins, one until 2009, Joanna Osborne, a partner until 2011, and John Kellas, one until 2004. In addition, Richard Fleck, its chairman, is a consultant with Herbert Smith, which used to advise KPMG.

The minutes of the meeting show that Ms Osborne and Mr Collins left when KPMG was discussed, according to a report into the affair published by the FRC in November last year. Mr Kellas stayed but “did not participate”. The report did not say what Mr George and Mr Fleck did, nor how anyone voted.

The FRC confirmed that it had appointed lawyers. “We took this approach, ie explaining why the request was out of scope and referring Ms Gibbs instead to information we had published in connection with her request, for consistency of treatment and fairness with all other FOI requesters whose requests are out of scope.”

Fines by the FRC last year were their highest ever at almost £15 million.

KPMG has been auditor to several leading British companies that have failed or come to close to failing, including Co-operative Bank, Carillion and Conviviality, the group behind Wine Rack and Bargain Booze.

The tribunal is due to hear the case on April 27.”

Source: The Times, paywall

“Survey reveals another section 114 notice [council insolvency] expected within a year”

Some councils are taking on riskier investments with consequent higher returns to maximise income – risky indeed in the current uncertain financial climate. As with those councils that bought (non-local) shopping centres as investments … which will need very savvy auditors to monitor …

“Three quarters of senior finance officers expect at least one other council to issue a section 114 notice in the next 12 months, according to a Room151 survey.

Last month, Northamptonshire County Council’s director of finance issued a 114 notice imposing immediate spending controls on the authority.

Room151’s Local Government Finance & Treasury Current Affairs Survey, sponsored by investment manager CCLA, found that more than half of respondents expect one or two more notices in the next year.

Presenting the findings to Room151’s LATIF north conference in Manchester this week, John Kelly, client director at CCLA, said that a further 20% expect between three and five further section 114s, with 3.5% expecting between five and 10.

However, when asked about their own council, 56% of treasury officers said they were either confident, or very confident, of financial sustainability.

Kelly said this result “doesn’t suggest there is any panic or any need to get unduly worried at present”.
Elsewhere in the research, 36% of those surveyed said that they had begun to invest in higher yielding instruments, due to the current funding squeeze, compared to 30% who said there had been no impact. …”

http://www.room151.co.uk/treasury/survey-reveals-another-section-114-notice-expected-within-a-year/

Carillion auditors paid £40m to provide apparently “false reassurance to investors” says Parliamentary Committee

The auditors rely on calling Carillion’s dicey contracts “optimistic”!!!

“The £40 million that KPMG and Deloitte were paid as the external and internal auditors of Carillion respectively has been described as a “colossal waste of money” by MPs.

At a testy hearing of the work and pensions and business joint select committee, the reputations of audit partners at the two international accountancy firms were shredded as incredulous MPs wondered why they had not dug deeper when alarm bells seemed to be ringing around the construction contractor.

MPs heard evidence from Michelle Hinchliffe, head of audit at KPMG, Peter Meehan, the KPMG partner who audited Carillion, and Michael Jones, who led Deloitte’s internal audit service at the contractor. KPMG was paid £29 million over 19 years by Carillion, and Deloitte £11 million over an unknown period. Rachel Reeves, co-chairwoman of the committee, said: “These audits appear to be a colossal waste of time and money, fit only to provide false assurance to investors, workers and the public.”

Ms Reeves criticised Mr Meehan and Mr Jones after their respective admissions that Mr Meehan had failed to visit at-risk Carillion projects and Deloitte had missed quarterly meetings with the Carillion board’s audit committee.

“Carillion staff and investors could see the problems at the company but those responsible — auditors, regulators, and, ultimately, the directors — did nothing to stop Carillion being driven off a cliff,” she said.

Mr Meehan told MPs that for the 2014 and 2015 audits he had visited the construction project in Qatar that the former chief executive Richard Howson blamed for Carillion’s collapse. Mr Meehan did not make any subsequent visits despite knowing of the importance of the contract. Carillion claimed that it was left with £200 million of unpaid bills in Qatar. Mr Meehan repeatedly stated that despite Mr Howson’s assertions, the Qatar contract had only become a serious issue in the months after the 2016 accounts were signed off in March last year and leading up to the major profit warning of last July, which laid bare the crisis at Carillion. The auditor conceded that Qatar had been flagged as an “amber warning” at a meeting in the February before the sign-off of those accounts.

On another contract, the £350 million construction of the Royal Liverpool Hospital, Mr Meehan admitted that although he had been on previous fact-finding site visits, he had not returned despite internal revelations of major on-site issues in November 2016. He finally made a visit to the hospital last month, four days before Carillion went bust. He contested claims that Carillion’s accounting had become aggressive but said that he had told Carillion board directors that their accounting on some of the “riskier contracts” had become “optimistic”. His concerns were overruled. Despite this, he said he remained happy to sign off the accounts.

Mr Meehan said he had become aware of the enormity of the issues in Qatar in May last year, at which point “we knew a writedown was coming”.

That writedown and those on Royal Liverpool, the Midland Metropolitan in Birmingham and the £700 million Aberdeen bypass were taken on July 10, at which point Mr Howson was removed from his post. Mr Meehan said a review of contracts at that point found that in previous internal reviews, managers had been more pessimistic about the likely outcome for the contracts than the position that was reported.

The auditor said confusion was such in the Carillion boardroom that on the night before the July profit warning, directors were debating whether the writedown should be £695 million or £845 million.”

Source: The Times (pay wall)

240 councils have taken out high-risk “toxic” loans

“A cash-strapped council which has banned all new spending is currently repaying £150m in “toxic” loans.

Northamptonshire County Council has invoked the ban on expenditure as it faces a £21m overspend for 2017-18. It said it would cost more than a quarter of a billion pounds to immediately repay the LOBO – or Lender Option Borrower Option – loans, described by critics as “risky”.

A council spokesman said “interest rate risk is inherent” in all borrowing.
The county council has a total of 19 LOBO loans, which are unregulated and typically spread over 40 to 70 years. They were used to meet expenditure on highways, infrastructure, schools and other such assets.

The authority said said it would cost £256m to repay them straight away.

Critics say the repayments would be better spent on under threat services such as bus subsidies and Trading Standards. Joel Benjamin, from campaign group Debt Resistance UK, called the loans “toxic”. He said the county council has “fallen victim to a lethal cocktail of cuts”, poorly run shared-services and “high interest, risky LOBO borrowing.” Financial expert Abhishek Sachdev said LOBOs “contained huge quantifiable risk at the outset”.

Mr Sachdev, who gave evidence about LOBOs to the Communities & Local Government Select Committee in 2015, added: “There is a reason why none of our large PLC corporate clients would ever enter into such a loan.”
Freedom of Information requests by Debt Resistance UK show around 1,000 LOBO loans have been taken out across 240 local authorities.

The figures show these have a face value of £15bn, while Mr Sachdev estimated it would cost about £26bn to exit them straight away.”

http://www.bbc.co.uk/news/uk-england-northamptonshire-42977061

“Grenfell fire: KPMG quits inquiry amid conflict of interest furore”

“… The accountancy firm audits the Royal Borough of Kensington and Chelsea, where the tower is located.

It also audits Rydon Construction, which refurbished the tower in 2015, and Celotex, which manufactured insulation material used in the tower. …”

http://www.bbc.co.uk/news/business-42598976

Owl says: if conflicts of interest were taken as seriously in Devon, we would have many fewer councillors, almost no quangos and DEFINITELY no Local Enterprise Partnership!

So, guess who EDDC’s new external auditors will be

Yep, former auditors Grant Thornton – the ones who found no problems following the expulsion from the local Tory party and subsequent resignation of disgraced ex-councillor Graham Brown after the front page sting in the Daily Telegraph.

And too late to send any representations about it.

“Having carried out their procurement exercise and decided on the scale of work to be allocated to each of the winning bidders, PSAA notified the Chief Finance Officer and Chief Executive that it was consulting on the appointment of Grant Thornton LLP as being successful in winning a contract and their appointed to EDDC for the 5 years from 2018/19, the appointment starting on 1 April 2018. Any representations to the proposal would need to be received by 22nd September 2017, as there was no reason to object to this appointment no representation was made.”

http://eastdevon.gov.uk/media/2269979/161117agcombinedagenda.pdf

Ex-EDDC regeneration officer and Exeter City Council CEO gets award

“Exeter City Council’s dedication to supporting business and economy has resulted in its chief executive being named as one of the 2017 Faces of Growth.

Karime Hassan is one of seven people to appear on the list, compiled by accounting and consultancy firm Grant Thornton. …”

http://www.devonlive.com/news/devon-news/exeter-city-council-chief-executive-739798

Grant Thornton award. Former external auditor to East Devon and Exeter City Council until new EU regulations forced some councils to change auditors a couple of years ago.

Karime Hassan: he grew East Devon as regeneration chief, he’s growing Exeter as Chief Executive, he will grow Greater Exeter as its lead officer.

Aren’t we lucky …