Deloitte's Conflict of Interest with the Ownership of MG Rover Group
On September 9, Big-Four international accounting firm Deloitte & Touche was fined a record £14m (about $22m) from the United Kingdom’s (UK’s) accountancy watchdog for failing to manage conflicts of interest over their advice to the doomed car maker MG Rover.
The Financial Reporting Council’s (FRC) independent tribunal also severely reprimanded the firm for its conduct over MG Rover, which crashed into administration (i.e., bankruptcy) in 2005 with debts of £1.4bn and 6,000 job losses. Its report said: “The public must be protected from misconduct of this nature.”
Four MG Rover directors – the “Phoenix Four” – set up the Phoenix company to buy the loss-making British car maker for a token £10 five years earlier. Deloitte and its partner and corporate finance expert Maghsoud Einollahi – personally fined £250,000 ($397,000) and banned from the profession for three years – both failed to properly manage conflicts of interest, the tribunal said.
Deloitte received more than £30m ($48) in fees for all its work on MG Rover between 2000 and 2005. But the complaints centered on two deals – Project Platinum and Project Aircraft. The two transactions involved buying loan books from Rover’s former owner BMW and a scheme to use tax losses from the Rover business to the benefit of the Phoenix Four.
The report said Deloitte had showed no signs of “co-operation, confession and contrition”. The FRC’s executive director for conduct, Paul George, said its verdict should be “essential reading for all members of the profession”. The FRC had originally wanted to fine Deloitte up to £20m but the accountant was pushing for a £1m penalty.
Deloitte has 28 days to appeal. A spokesman said its audit work had not been criticized and the ruling could have “negative implications” for the advice accountants can offer clients. He added: “We remain disappointed with the outcome of the tribunal and disagree with its main conclusions. As a firm we take our public interest obligations seriously in everything we do. We are disappointed that the efforts we and others made did not successfully secure the long term future of the MG Rover Group.”
The fine came as Deloitte and other auditing firms face pressure from regulators to sharpen their standards and act with greater independence in questioning clients' activities.
Deloitte's U.S. financial-advisory services unit in June agreed to pay $10 million and accept a one-year ban from consulting for New York-regulated banks, in a settlement with New York's Department of Financial Services over its anti-money laundering work for U.K. bank Standard Chartered PLC.
The MG Rover case is unusual in that the FRC (UK regulator) alleged that Deloitte failed to consider the public interest in a series of transactions between the auto maker, its owners and associated companies, and to address potential conflicts of interest among the parties. The FRC said the tribunal’s decision should “send a strong and clear message to all members of the accountancy profession about their responsibility to act in the public interest and comply with their code of conduct.
The unusual aspect of the charges is to directly incorporate the public interest dimension of the work of chartered accountants (CPAs) in the allegations of misconduct. While the public interest always is negatively affected when a violation of the code of ethics exists, I found it refreshing for the FRC to be so blunt about it.
The accounting industry needs to be reminded from time to time that the public places its trust in accounting and auditing professionals to protect their interests. All too many professionals allow external interests cloud their judgment including those of the individual, the firm, and the client’s interests. The Sarbanes-Oxley Act that was adopted by the U.S. Congress in 2002, and the Public Company Accounting Oversight Board that was formed in the aftermath, establish strong standards that are designed to protect audit independence and avoid conflicts of interest.
The conflict for Deloitte was that it audited MG Rover while also acting as corporate finance adviser to companies controlled by or affiliated with the ownership/management of the company. That is a blatant violation and anyone who understands Ethics 101 would know that Deloitte’s actions were not in keeping with the spirit of PCAOB independence rules. I have to wonder what motivated Deloitte to become involved in such a conflict whereby it was auditing the effects of decisions it had advised the owners while rendering, presumably, an independent audit report. Could it have been hubris or good old fashioned greed? In either case Deloitte was ethically blind to the possible effects of its actions on the public.
Blog posted by Steven Mintz, aka Ethics Sage, on September 13, 2013