Grave misconduct in insolvency profession uncovered
21st June 2021
Today’s landmark provisional findings against KPMG and an independent insolvency practitioner David Costley-Wood have exposed a pattern of exploitation and serious conflicts of interest in the insolvency profession. This is a timely reminder of the potential for serious failures in this industry and reinforces the need for a strong, independent regulator to ensure transparency and fairness are prioritised in this industry.
The APPG on Fair Business Banking launched an inquiry into the insolvency profession in January 2021 and results of an industry-wide call for evidence are expected in the Autumn. Ahead of the inquiry results, multiple interest groups alongside the APPG have been calling for an independent regulator for the insolvency industry.
Decisions made to benefit Costley-Wood and KPMG were taken despite the knowledge of substantial impact on the pensions of Silentnight factory workers, as well as considerable losses to Silentnight and its creditors.
The clear conflict of interest and lack of objectivity in the Silentnight case demonstrates a wider issue with the insolvency industry where practitioners are reliant on good relationships with large clients to get further work. Cosy relationships between firms and their clients lead to often devastating outcomes for the businesses who have no choice but to put their faith in a process that is supposed to protect the interests of creditors and stakeholders alike.
However, without adequate checks and balances and a robust regulator, this case demonstrates that the systems can be used not as a process of last resort, but as a tool of control that allows for profiteering at the expense of the weaker stakeholders. This is the second time this year that a large accountancy firm has been accused of Misconduct in this industry.
In a scathing 47-page document, the principal draft findings found that KPMG stood “shoulder to shoulder” with Costley-Wood throughout the process with “no acceptance by senior management of any Misconduct at any stage and, so far as EC is aware, no action in response to it.” The accountancy firm has been fined £15 million as “a starting point”, with Costley-Wood facing fines of at least £500,000. The tribunal highlighted a real risk that the misconduct will occur again.
“In the circumstances, and given the lack of insight and regret shown by Mr Costley-Wood in relation to his Misconduct (“This whole case here is just a witch hunt” “The fact that I am sat here being accused of dishonesty…and misconduct is frankly outrageous”) and his “somewhat casual approach to procedure and regulation” (Report at [53.4.1]), EC submits that there is a real risk that the same type of Misconduct will occur.”
Kevin Hollinrake MP, Co-Chair of the APPG on Fair Business Banking commented “The provisional findings are welcome, the egregious actions of KPMG and David Costley-Wood with no regard for the pensions of Silentnight factory workers, are rightly being treated with the upmost gravity. This further emphasises the need for the APPG on Fair Business Banking to continue to look closely at this industry, our inquiry will take this most recent evidence into account and results will be published in the Autumn.”
“We are very impressed with the Financial Reporting Council for the diligent work in this exceptional case, unfortunately to date we have not seen similar rigour from the professional representative bodies who currently have the responsibility of overseeing the activities of insolvency practitioners. We need a long term solution in the form of an independent regulator for the sector.”
James Russell, a partner at Humphries Kerstetter said: “The provisional findings against Costley-Wood and KPMG would appear to be without precedent. Costley-Wood, for whom KPMG is liable, has been found to have acted dishonestly – such was the extent to which he was prepared to go to advance the interests of HIG as a longstanding client of the firm and thereby retain that client relationship. The strategy to enable HIG to take control of Silentnight appears to have been conceived at an early stage in the hope and expectation that KPMG would subsequently be appointed as Insolvency Practitioners. The dealings between institutional creditors and accountancy firms in the pre-appointment “twilight period” are very rarely aired in public but lie at the heart of perceived problems with the current insolvency regime which are currently being investigated by the All Party Parliamentary Group for Fair Business Banking.”