This article was first published in the November/December 2013 UK issue of Accounting and Business magazine.
Deloitte’s decision to appeal against the £14m fine imposed on it by the Financial Reporting Council (FRC) for misconduct in the MG Rover Group (MGRG) case reflects the profession’s unease over ‘public interest’ duties, as well as shock at the way the enforcement goalposts have moved.
Confusion over public interest would be dispelled if professional codes stated unequivocally that it must come first. Instead, as the professional body in the Deloitte/MGRG case puts it, members are merely expected to take the public interest into ‘consideration’. The fact is that, outside public service, there are competing duties, including to clients and employers.
Nevertheless, it is often easy to see when the public interest has been harmed. The Phoenix Four’s extraction of tens of millions of pounds from MGRG as it slid towards insolvency is an example. And the 2009 report into the affair by the Department of Business, Innovation and Skills made it clear that Deloitte’s head of corporate finance outside London, Maghsoud Einollahi, was intimately involved in the quartet’s modus operandi.
But that report also said: ‘Responsibility for such transactions must rest with the members of the Phoenix Consortium rather than
with Mr Einollahi.’
Nor did it find any evidence that Deloitte’s independence as MGRG’s auditor was compromised by the non-audit fees of nearly £29m
between 2000 and 2005 being some 15 times more than total audit fees.
Add in the size of the fine compared with much milder historic penalties, and even a cynic must take Deloitte’s stand seriously.
A key question is whether the public interest factor can be watered down for non-audit work. But professional ethics don’t work like that: they apply across all activities. As does the obligation not to bring the profession into disrepute.
The two Phoenix deals that the FRC chose for its attack are the most disreputable because they provided the means for large amounts of money to be paid into the Phoenix Four’s Guernsey trust.
Another question is whether conflict-of-interest allegations are mitigated if the questionable practice was common at the time – accepting contingent fees, for instance, which are paid only if the deal is done. Such fees can easily bias the adviser in favour of a certain transaction when objective advice might be either do the deal with another party or don’t do it at all.
Deloitte may be unlucky in being singled out for exemplary punishment, but several wrongs do not make a right. That includes the inadequacy of legislation to punish directors who harm the public interest, which is being tackled elsewhere.
I am more inclined to sympathise with Deloitte over the anachronism of the FRC’s action. The deals in question were done between January 2001 and August 2002. Enron’s bankruptcy did not happen until late 2001 and the regulatory reaction did not kick in until July 2002.
It should not have been a different world then, but it was. The financial crisis showed that many of the issues to do with professional independence and conflicts of interest were still festering in the late 2000s – and the jury is out on whether behaviour has improved for good.
The FRC is putting down markers for the future. It is, at last, operating a tougher enforcement regime and applying it to professional standards. This is essential to restore trust in the accountancy profession.
Even if its retrospective action is clipped, its timing is spot on in a broader context. Once again the Big Four firms have been building up their consulting and corporate finance work to outstrip audit.
Deloitte’s discredited role as corporate finance adviser in the MGRG affair is a loud reminder of the risks of this approach.
With so much happening on the audit front, any prompt to stay focused on the core is welcome.
Jane Fuller is former financial editor of the Financial Times and co-director of the Centre for the Study of Financial Innovation think-tank