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KPMG offers 'untruthful' defence in Silentnight tribunal

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A new report from the Financial Reporting Council (FRC) highlighted evidence that the Big Four firm was dishonest during the investigation into the Silentnight insolvency case.

14th Oct 2021
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The Financial Reporting Council (FRC) published a summary of a tribunal that found a senior partner at KPMG had presented an “untruthful” defence during a disciplinary hearing.

The FRC hearing was convened to investigate KPMG’s misconduct during the sale of bedmaker Silentnight to a private equity fund. The tribunal found that partner David Costley-Wood failed to co-operate with the accounting regulator’s investigators.

Conflict of interest

During August of this year, KPMG was fined £13m and incurred costs of over £2.75m for its role in placing Silentnight into a insolvency process during 2011 that allowed private equity firm HIG Capital to acquire it without the burden of a £100m pension scheme liability.

KPMG’s lack of objectivity and “obvious” conflict of interest was the latest in a string of public humiliations including lawsuits and disciplinary complaints relating to audits the firm carried out at Carillion, Rolls-Royce and Conviviality, the owner of Bargain Booze.

This latest sanction was a huge financial hit for the Big Four firm. The tribunal report states that for the first time ever, the tribunal found a respondent had advanced dishonest evidence. 

Costley-Wood, who faced fines of £500,000 for his involvement in the original case, claimed that Silentnight faced a “burning platform” prior to the debt sale agreement. However, the tribunal stated: “The defence put forward by Mr Costley-Wood in relation to the burning platform was a construct invented by him to assist in his defence.”

The FRC said mounting an untruthful defence “seriously risks undermining the regulatory system [and] compounds the original failings”.

Failure to cooperate

The report also found that:

  • KPMG failed to reveal to share material facts with the FRC executive counsel when required, such as recording £45,000 of time costs prior to its formal engagement and an ad hoc retainer with Silentnight that started around 16 August 2010.
  • Costley-Wood created a note of a crucial meeting on 16 August 2010 some 13 months after the event, specifically in response to an investigation by the Pensions Regulator. However, neither Costley-Wood nor KPMG drew to the attention of either the Pensions Regulator or the FRC investigation that the note was produced over a year after the meeting in question.

“The failure to carry out comprehensive searches in response to the specific requests by the executive counsel is a serious matter as it does exhibit a failure to cooperate,” the tribunal stated.

The tribunal decision highlighted failures by KPMG and its lawyers Linklaters to disclose documents on time, including 118 that were originally not produced because a search was run against the name “Costly” instead of “Costley”.

Almost three months after the tribunal hearing KPMG had still not produced more than 1,800 documents that were missed because of similar search errors.

KPMG UK chief executive Jon Holt told AccountingWEB: “This report makes difficult reading. We accept the findings of the tribunal, and we regret that the professional standards we expect of our partners were not met in this case and that it has taken over a decade to reach this point. 

“We no longer provide insolvency services and we have improved our broader controls and processes significantly since this work was performed in 2010. We will reflect on the tribunal’s findings carefully and ensure that we learn lessons to reinforce our focus on building trust and delivering work of the highest quality.”

Elizabeth Barrett, FRC executive counsel, commented: “KPMG and Mr Costley-Wood compounded their serious misconduct by advancing a defence to proceedings which was partly untruthful and by failing to cooperate with the investigation. This ruling contains important learnings for members and member firms, both in relation to the original misconduct and in relation to the conduct expected once an investigation has been commenced.”

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Replies (19)

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By Paul Crowley
14th Oct 2021 16:43

Exasperating
The firm was lying, the solicitors claimed that they could not spell and documents deliberately withheld.
Why do we bother trying to get work done honestly and with integrity if the big boys act like this?
Answer, because we care. The big boys like to look after their own.
If we were looking at some trainee claiming a bit too much in the way of expenses, they would of course throw him under a bus, report to ICAEW and ruin him for life.

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Replying to Paul Crowley:
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By Hugo Fair
14th Oct 2021 16:59

100% ... although your first 5 words really says it all.

Although often described as a club (which, once upon a time, was meant to generate visions of gentlemen in leather chairs & smoking cigars) ... it actually operates exactly like a bunch of gangs. You have to perform a dastardly action (grievous bodily harm is replaced by cheating on a grand scale), which then both 'proves' your worth to the gang and leaves you in thrall to them should you try to leave later!

Power tends to corrupt, and absolute power corrupts absolutely ... what is needed is a separate system that manacles that power as a balance with public needs.

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Replying to Hugo Fair:
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By Paul Crowley
14th Oct 2021 17:06

The problem in perception will always be that ICAEW operates with the large practices deemed as exemplars.
The committes are full of their members, so a difficult perception to dislodge.

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Replying to Paul Crowley:
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By More unearned luck
14th Oct 2021 17:42

The sols are not the only ones who can't spell: the Aweb sub-editor can't spell 'defence'. It must be contagious.

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Replying to Paul Crowley:
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By hiu612
15th Oct 2021 10:08

In fairness, Costley-Wood was given 15 years exclusion from ICAEW and a ban on practising in insolvency for the same period.

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Replying to hiu612:
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By bobsto12
15th Oct 2021 10:26

Kpmg are paying his fine. I'm sure he is a wealthy man and has enough to retire on. Never nice being humiliated though but the message is get what you can, when the truth comes out you'll be set up for life anyway. Some deterrent.

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By TaxEye
15th Oct 2021 10:21

Why no jail time?

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By Hugo Fair
15th Oct 2021 11:02

One wonders whether the "lessons learned" have more to do with a determination to not be found out next time (rather than to not commit the crime again)?

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By colinstewart
15th Oct 2021 11:27

Words just fail to have the ability to express the anger for the shame that these people have brought to all of us here, and in the greater profession, who work tirelessly and with the highest standards always in the front of their mind.

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By unclejoe
15th Oct 2021 11:58

Once again the regulators have shown that they are not fit for purpose. £13m fine is peanuts to KPMG - simply a cost of doing business. And £500k fine for Costley-Wood would hardly make a dent in his standard of living, even if he had to pay it, which he won't as KPMG will pay. It is individuals who commit or enable such crimes and the system will not improve until meaningful penalties are imposed. Costley-Wood should have faced a real penalty that would see his wealth and income reduced to no more than population average, and probably a spell in jail. KPMG will certainly learn a lesson - that they can continue to enable crime and corruption, just make sure that they have included a possible cost in the budget.

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Replying to unclejoe:
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By paul.benny
15th Oct 2021 15:23

According to 2020 financial statements, profit available for distribution to partners was £137m and average partner distribution was £572k.

I think the penalties are a bit more than a cost of doing business. Especially when you factor in the legal fees and non-billable staff time incurred by the investigation and defence.

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By 2TunTed
15th Oct 2021 13:40

Another large firm on the naughty step. Presumably now, years after these shameful events, the appropriate institute will take action against the firm AND the individual? (Will there be a criminal prosecution? Dont hold your breath)

Brings a whole new meaning 'to making your own bed and lying in it'.

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By Justin Bryant
15th Oct 2021 13:59

KPMG UK chief executive Jon Holt told AccountingWEB: “So what? We are too big to fail etc."

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Replying to Justin Bryant:
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By Paul Crowley
15th Oct 2021 14:34

Is so then he sounds like a banker

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Replying to Justin Bryant:
Pile of Stones
By Beach Accountancy
15th Oct 2021 19:10

We thought Arthur Andersen was too big to fail too

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By paul.benny
15th Oct 2021 15:10

With 10 years from offence to disciplinary finding, the firm can plausibly claim to have changed and improved. Whether that's true is another matter.

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Replying to paul.benny:
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By Hugo Fair
15th Oct 2021 17:14

Or you could look it the other way round (as I suspect the firms and their legal advisers do) ... if you can delay/string out the actual prosecution for as long as possible, then you can claim that "it was all in the past and lessons have been learned" without actually making any changes at all!

When are they ever asked to define the lessons learned and/or prove the changes made?

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Nefertiti
By Nefertiti
15th Oct 2021 17:42

LOL another day, another fraud perpetrated by a big name in the Auditing and Accounting profession. When will we plebs realise that the stringent rules and ethics only apply to us. We struggle to provide a decent and honest service to clients who regard us as nothing more than pen pushers and resent every penny they pay us. When will we open our eyes and realise that the rich NEVER have to follow any rules or regulations and they get away with it too each and every time, because our governing bodies always protect the rich and bend rules for them.

Do you think the KPMG partner who lied will lose his qualifications? OFCOURSE NOT.
Do you think KPMG will be shut down after this scandal? OFCOURSE NOT.

They will be fined as usual so that the governing body can pretend how strict they are as they enjoy the windfall from this ill gotten gain. Thieves benefiting from the misfortune of other thieves who were stupid enough to get caught.

If you want my advice, stop paying your annual membership fees and quit the profession. They will ask for your certificate back but there are lots of part time and contract roles for people who are good at accounts and work for a reasonable price. Those days when Accountancy was a respectable profession are long gone. It's just a dog eat dog world now.

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By Mr J Andrews
18th Oct 2021 15:37

KPMG has become a four letter word.

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