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Quindell saga ends with £152m restatement. Or does it?

6th Aug 2015
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Quindell PLC

The FRC has closed its investigation into Quindell’s accounts after requiring the company to restate its financial results for the last two years.

Downward prior year restatements amounting to £152m were published alongside delayed figures showing the company’s revenue slumped by £290m, and its post-tax profits by £282m in the year to 31 December 2014.

According to the FRC’s official announcement, the changes needed in Quindell’s 2012 and 2013 accounts included:

  • Revised accounting policies for claims management revenue recognition and related costs that reduced 2013 revenue by £109m and profit after tax by £130m.
  • Reinterpreting the acquisition of Quindell Limited by Mission Capital as a reverse acquisition, with the effect of reducing goodwill and net assets at 31 December 2012 and 2013 by £25m. 
  • A £4m reduction in the revenue booked for transactions in 2011 that reduced net assets at 31 December 2012 and 2013 by £2m.

Quindell’s troubles started in April 2014 after the short-selling firm Gotham City Research  published a dossier alleging that “42%-80% of Quindell’s profits are suspect”. Gotham City stated that Quindell’s biggest client was itself and that the company “was little more than a country club until 2008/09, yet QPP somehow began reporting Microsoft/Google-esque profit margins in 2010/2011”.

“Quindell’s shares are worth no more than 3p,” concluded the report. Quindell responded by taking Gotham City to court for libel.

Quindell did start life as a country club, before going on an acquisition spree under the auspices of now ousted founder Rob Terry. As David McCrum explained in the FT’s  Alphaville blog, the company’s acquisitions were mostly insurance-related: “Claims management, legal services, physiotherapy, telematics, bought with a lot of Quindell stock typically issued at a premium to the existing price.”

Terry was ousted in November last year, when the company reported that three directors had bought shares using a loan secured against their pre-existing stakes. Quindell brought in a new management team; chairman Richard Rose was appointed in January and finance director Mark Williams in April. Terry has not yet been replaced as chief executive, but the company said an appointment is imminent.

Quindell is not out of the regulatory woods, however. Following the restatement announcement, the Serious Fraud Office launched an investigation into the company’s business and accounting practices yesterday. Quindell responded by saying it would “continue to cooperate with all relevant regulatory and law enforcement authorities”.

The FRC is not done with the case either. The regulator's Professional Discipline Team has now opened separate investigations into members and two member firms in relation to the preparation, approval and audit of the financial statements of the company for the period ended 31 December 2011 to the year ended 31 December 2013 and for the preparation and approval of the company’s interim results for the half year ended 30 June 2014.

The two member firms are believed to be KPMG and Baker Tilly (formerly RSM Tenon), both of which acted as Quindell’s auditors between 2011 and 2013.

KPMG audited Quindell’s 2013 accounts, which included a pre-tax profit of £107m that was restated on Wednesday as a £64m loss. Quindell’s accounts show that KPMG “raised a number of concerns with management” about the company’s financial disclosures, but those concerns were overridden.

Quindell’s shares were suspended from AIM on 24 June. The company resumed trading at 7.30am this morning after yesterday’s results announcements.

Quindell sold its legal arm – as well as most of its insurance and telecoms business – to the Australian legal group Slater & Gordon for £637m last year. 

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By sammerchant
06th Aug 2015 16:12

What price an audit?

So how much faith should shareholders put in Audited Accounts?

 

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By Financeman
07th Aug 2015 10:47

Agree with new - one has to question

- the auditors

- the management (the whole board not just RT)

- the advisors

- AIM

All in all a shocking endictment of London's reputation as a financial centre - so no doubt the broom will be busy sweeping it all under the carpet

 

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By redboam
07th Aug 2015 12:01

Auditors

What is really needed to maintain London's reputation is not more regulation but audits that do what they are supposed to do. The performance of the big four with respect to the banks some years ago for example were frankly lamentable and judging from this and other recent fiascos, no better today.

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By Jon Pickles
07th Aug 2015 11:33

Not quite

"Terry was ousted in November last year, when the company reported that three directors had bought shares using a loan secured against their pre-existing stakes."

Not quite true - although that is how the Directors wanted shareholders to see it. In fact they all sold the vast majority of their shareholdings to an outfit called Equities First, and used a fraction of the proceeds to buy a few more shares. The sale to Equities First included an option - but not an obligation - on the Directors to repurchase the shares at the price sold. They tried to dress this up as a share purchase.

Ultimately an auditor is a "watchdog not a bloodhound" - a determinedly fraudulent management can pull the wool over an auditor's eyes. (Although having followed this case for a couple of years I wonder at the sheer quantity of wool required in this instance).

Take a look at www.shareprophets.com for journalist Tom Winnifrith's exposé of Quindell - he started calling this as early as 2013.

 

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Replying to Paul Crowley:
Francois
By Francois Badenhorst
07th Aug 2015 11:39

Thanks

Jon Pickles wrote:

"Terry was ousted in November last year, when the company reported that three directors had bought shares using a loan secured against their pre-existing stakes."

Not quite true - although that is how the Directors wanted shareholders to see it. In fact they all sold the vast majority of their shareholdings to an outfit called Equities First, and used a fraction of the proceeds to buy a few more shares. The sale to Equities First included an option - but not an obligation - on the Directors to repurchase the shares at the price sold. They tried to dress this up as a share purchase.

Thanks for the explanation, Jon! 

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Replying to Paul Crowley:
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By Jkwright
07th Aug 2015 19:06

Factual Detail

Jon - sorry to pick you up on your post, but you have not been candid with your post, in fact as you have followed this for a couple of years you will be extremely familiar with the detail and as such have been disingenuous in your response.

 

Factual detail taken from RNS: 5552W issued on Monday 10th November 2014 @ 07:00

 

You state "In fact they all sold the vast majority of their shareholdings to an outfit called Equities First"  this totally incorrect.

 

Rob Terry (Chairman) held 45,650,000 shares and 'sold' 8,850,000 [19.4% of his holding] to EFH @ ~£0.843/share after fees, receiving £7,465,596

Laurence Moorse (FD) held 1,196,666 shares and 'sold' 200,000 [16.7% of his holding] to EFH @ ~£0.843/share after fees, receiving £168,714

Steve Scott (NED) held 5,112,992 shares and 'sold' 1,350,000 [26.4% of his holding] to EFH @  ~£0.843/share after fees, receiving £1,138,820

 

I think you would accept that the maximum disposal being 26.4% in no way can this be considered 'vast majority' of any of the holdings.

 

You then state "...and used a fraction of the proceeds to buy a few more shares", inferring again that they 'all' used a fraction of the proceeds to buy a 'few' more shares, again this is incorrect.

 

Rob Terry (Chairman) purchased 1,000,000 [11.3% of quantity 'sold'] @ £1.2347/share, a cost of £1,234,700 [16.53% of 'sale' proceeds]

Laurence Moorse (FD) purchased 50,000 [25% of quantity 'sold'] @ £1.2300/share, a cost of £61.500 [36.45% of 'sale' proceeds]

Steve Scott (NED) purchased 700,000 [51.85% of quantity 'sold] @ av. £1.2309/share , a cost of £861,647 [75.66% of 'sale' proceeds]

 

If purpose of the EFH transactions was to raise funds for share purchases then it will be obvious with the difference in proceed per share from EFH vs market cost per share to buy they would never be able to purchase the same quantity of 'replacement' shares from those proceeds alone, as evidenced above. However, it can be seen that for example Steve Scott did in fact use 75.66% of his 'sale' proceeds to purchase 51.85% of his shares 'sold'. Again I think you would accept, hardly a 'fraction of the proceeds' to buy a 'few more shares'.

 

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By AndrewV12
07th Aug 2015 12:52

There not...

Quindell are not the first and they will not be the last.

 

I have just had a brief look at the accounts of Quindell Ltd, they do not look to bad, looks like a well run Company, or are all of the figures in the Accounts in dispute.

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Replying to bernard michael:
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By Jon Pickles
07th Aug 2015 14:26

Look at the 2014 results with all the restatements (including goodwill restated as director remuneration!) and the audit qualification....

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By Myshkin
12th Aug 2015 14:12

Pointless

I long ago concluded that audits were pointless and that if management want to manipulate accounts they are more than free to do so.

 

This is maybe an extreme example but KPMG still walked away with a big chunky fee which has no doubt now been transferred into their partners pension pots.

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By sammerchant
12th Aug 2015 14:26

Fine line

There is a fine line between 'fair comment' and 'libel'. We must always remember that. I am not implying that anyone has transgressed so far!

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