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Farepak auditors face disciplinary tribunal

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20th Nov 2012
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Farepak auditors Ernst & Young and one of its former partners are facing disciplinary action from the Financial Reporting Council (FRC). 

The FRC accused ICAEW members, EY and auditor Alan Flitcroft of misconduct and failing to meet expected auditing standards when auditing failed Christmas savings firm Farepak.

The company, which people made regular payments to in order to save up for Christmas gifts and hampers, entered administration in 2006 leaving no money available to creditors.

Around 120,000 savers were left with losses of £37m, which minister for consumer affairs in 2006 Ian McCartney called a "national emergency".

Following this, nine Farepak directors, including their finance director, faced disqualification but the High Court case collapsed.

The FRC made a disciplinary former complaint into EY and Flitcroft's conduct when auditing accounts ending 28 April 2005.

Allegations included:

  • They failed to properly consider Farepak's ability to continue as a going concern and disclosures in the financial statements
  • They failed comply with ICAEW code and requirements of applicable auditing standards 
  • They did not properly obtain sufficient evidence on which to base their opinion 
  • They failed to consider events between the date the financial statements were prepared and when they were issued in February 2006

Flitcroft, now the FD of Ascot racecourse, was Farepak's auditing partner and signed off on the audit.

He and the UK branch of EY will now be investigated under an independent disciplinary tribunal.

EY said they take the matter "extremely seriously", but could not comment before the tribunal, while ICAEW was also unable to comment on individual cases. 

One reason for the company's collapse included the suggestion that Christmas clubs have no need to ringfence money they collect, which has led to other savings clubs such as the Co-Op to launch protected schemes.

Farepak lender HBOS has been partially blamed for the collapse and made a payment of £8m to the savers.

Legal battles led to customers being reimbursed in September of about half of what they were owed, according to liquidators BDO. 

AccountingWEB member David Winch spent time researching the Farepak saga for a BBC programme on the company and provided further background into the case.

"Farepak was part of a larger group of companies, European Home Retail. It was highly seasonal and customers paid months in advance, which meant for a lot of the year Farepak was cash rich," he said. 

Winch explained how the cash resource was seen by the group of companies as an opportunity to expand and diversify business, which they used to buy books, toys and stationery company DMG for £38m. The deal was financed by HBOS as well as Farepak savers' funds. 

"The purchase proved a disaster," Winch said. "DMG was sold by the group in 2003 for just £4m. The group lost perhaps £40m to £50m through DMG." 

Despite Farepak's attempts to rebuild finances with other ventures, the bank pulled the plug in 2006 and the company went into administration. 

"Perhaps the moral of the story is that the group should never have purchased a business on the bank of seasonal pre-payments of customers' cash and the bank should never have agreed to finance that," Winch finished.

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David Winch
By David Winch
21st Nov 2012 10:28

If you are wondering . . .

If you are wondering why I said European Home Retail lost perhaps £40m to £50m when they bought a business for £38m and sold it three years later for £4m, the reason is that after they purchased it they invested time and money in developing the business (or attempting to).  But their plans came to nothing and they sold it off cheaply - losing, in effect, the bulk of the purchase price and the money subsequently invested in it.

But that sale was in 2003 and the group finally collapsed in late 2006.

It is a moot point whether the Farepak customers would have behaved any differently whatever the auditors of the group had done - but that is not the issue which the FRC will be addressing.

Arguably the biggest single factor in the group's collapse was the decision in 2000 to purchase DMG for £38m (and the bank's decision to support that) - £33m of that purchase price was accounted for as 'goodwill' which had to be written off a few years later.

David

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By david5541
21st Nov 2012 12:24

the market has been rigged for too long

in capitalising most of the purchase price as goodwill in 2000  was corporate financier's/private equity investors favourite way of dumping debt into solid trading companies-it was happening everywhere....on the back of debt finance so led to the wind up of woolworths and now comet and soon four seasons healthcare.

 

now its the companies' staff and headcount that are paying the price not the private equity advisers.

 

Ernst and Young are the only big 4 member who have not been envolved in the autonomy stich up of hewlett packard.

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