Sanctions against KPMG and former partner in relation to Silentnight
News types: Investigations, Policies and Responsibilities
Published: 5 August 2021
The Financial Reporting Council (“FRC”) today announces sanctions against KPMG LLP (KPMG) and David Costley-Wood, formerly a partner and Head of KPMG Manchester Restructuring. This follows a referral from The Pensions Regulator and an investigation undertaken pursuant to the Accountancy Scheme* in relation to Mr Costley-Wood’s conduct in respect of the Silentnight group of companies in the period August 2010 to April 2011. An independent Disciplinary Tribunal made findings of Misconduct following a four-week hearing during November and December 2020 and sanctions were determined following a hearing in June 2021.
Sanctions
KPMG has been:
Sanctions
KPMG has been:
- fined £13 million,
- severely reprimanded and
- ordered to appoint an independent reviewer to:
- conduct a Root Cause Review to establish:
- why threats to compliance with the fundamental principle of objectivity were not appropriately identified and safeguarded in the period prior to the appointment of office holders in the Silentnight matter; and
- in a sample of past cases, whether threats to compliance with the fundamental principle of objectivity were appropriately identified and safeguarded in the period prior to the appointment of office holders and if not, the reasons for such failures; and
- conduct a review of various policies, procedures and training programmes relating to various of KPMG’s advisory services practices in the light of the results of the Root Cause Review.
- fined £500,000,
- severely reprimanded,
- excluded from membership of the ICAEW for 13 years and
- precluded from holding an insolvency licence for the same period.
The Tribunal made findings of Misconduct in respect of breaches of the fundamental principles of Objectivity and Integrity.
It described the history of KPMG’s involvement with Silentnight in this case as deeply troubling as KPMG failed to act solely in its client’s interests, acted in fundamental respects contrary to those interests and in those of a party whose interests were diametrically opposed to those of Silentnight. It concluded that the lack of objectivity in this matter went to the core of the relationship between Silentnight and KPMG.
The Tribunal also held that, in addition to the lack of objectivity in relation to his dealings with Silentnight, Mr Costley-Wood acted dishonestly and therefore he and KPMG acted with a lack of integrity including in their dealings with the Pension Protection Fund (“PPF”) and the Pensions Regulator (“tPR”) despite Mr Costley-Wood acknowledging that there was an obligation to act transparently in relation to a regulator.
The Tribunal commented:
Breaches of the principles of integrity and objectivity risk seriously undermining public confidence in the standard of conduct of Members and Member Firms and in the profession generally, all the more so where, as here, the professional has acted dishonestly. Dishonesty is inimical to everything that a profession stands for and especially destructive of public confidence’.
The Tribunal found that Misconduct had been established in that:
Throughout the period 16 August 2010 to 14 January 2011 Mr Costley-Wood advised and/or assisted both Silentnight and HIG in relation to a proposed acquisition of Silentnight by HIG at a time when there was a conflict of interest between the interests of Silentnight and HIG, and as a result the Respondents’ judgement was compromised and objectivity impaired.
Mr Costley-Wood assisted with a strategy designed to drive Silentnight into an insolvency process, or to the brink of such a process (a “Burning Platform”), with a view to passing Silentnight’s Pension Scheme to the PPF at the expense of Pension Scheme members and PPF levy payers. In this context Mr Costley Wood provided advice and assistance to HIG so that it could acquire Silentnight as an otherwise profitable business without the burden of the Pension Scheme liabilities.
The Respondents failed, in addition, to consider the self-interest and familiarity threats which arose from their relationship with HIG and from their desire to nurture that party as a client and keep them ‘onside’. Mr Costley-Wood was conscious of the importance of the potential relationship of HIG to KPMG throughout. The Respondents’ loss of objectivity underlay or drove much of what they did in relation to Silentnight throughout the relevant period, including assisting and advising HIG in its plan to acquire Silentnight free of the Pension Scheme liability from the summer of 2010.
Mr Costley-Wood dishonestly advanced and associated himself with untrue and misleading and/or materially incomplete statements to the PPF, tPR, Silentnight and the Trustees of the Silentnight Pension Scheme as to the causes of Silentnight’s difficulties in order to assist HIG in its efforts to enable Silentnight to shed its liability under the Pension Scheme as cheaply as possible.
KPMG is legally liable under the Accountancy Scheme for the conduct of Mr Costley-Wood, and accordingly findings of Misconduct by KPMG were made by the Tribunal in respect of the same matters.
One further allegation of misconduct made by the FRC was not upheld by the Tribunal.
In determining the sanctions, the Tribunal considered the Misconduct was very serious, noting that to a professional accountant the conflicts of interest should have been obvious and that the Misconduct risked the loss of significant sums of money. It put at risk Silentnight’s ability to survive and tens of millions of pounds of creditors’ claims, potentially exceeding £100 million as the liability to the Pension Scheme would crystallise. The Misconduct potentially adversely affected a significant number of people. The majority of the membership of the Pension Scheme comprised factory workers, many of whom had worked for Silentnight and contributed to the pension scheme for much of their working life. This was a foreseeable consequence of the plan to ‘dump’ the pension scheme into the PPF.
The Tribunal considered the Respondents’ Misconduct in respect of advancing or associating themselves with untrue, misleading or incomplete statements to the PPF, tPR, and the Trustees to be especially egregious given that they knew they had to be open and transparent with these parties and that they intentionally sought to mislead them in order to assist HIG in its efforts to enable Silentnight to shed its liability under the Pension Scheme as cheaply as possible.
The Tribunal further commented:
Throughout the period 16 August 2010 to 14 January 2011 Mr Costley-Wood advised and/or assisted both Silentnight and HIG in relation to a proposed acquisition of Silentnight by HIG at a time when there was a conflict of interest between the interests of Silentnight and HIG, and as a result the Respondents’ judgement was compromised and objectivity impaired.
Mr Costley-Wood assisted with a strategy designed to drive Silentnight into an insolvency process, or to the brink of such a process (a “Burning Platform”), with a view to passing Silentnight’s Pension Scheme to the PPF at the expense of Pension Scheme members and PPF levy payers. In this context Mr Costley Wood provided advice and assistance to HIG so that it could acquire Silentnight as an otherwise profitable business without the burden of the Pension Scheme liabilities.
The Respondents failed, in addition, to consider the self-interest and familiarity threats which arose from their relationship with HIG and from their desire to nurture that party as a client and keep them ‘onside’. Mr Costley-Wood was conscious of the importance of the potential relationship of HIG to KPMG throughout. The Respondents’ loss of objectivity underlay or drove much of what they did in relation to Silentnight throughout the relevant period, including assisting and advising HIG in its plan to acquire Silentnight free of the Pension Scheme liability from the summer of 2010.
Mr Costley-Wood dishonestly advanced and associated himself with untrue and misleading and/or materially incomplete statements to the PPF, tPR, Silentnight and the Trustees of the Silentnight Pension Scheme as to the causes of Silentnight’s difficulties in order to assist HIG in its efforts to enable Silentnight to shed its liability under the Pension Scheme as cheaply as possible.
KPMG is legally liable under the Accountancy Scheme for the conduct of Mr Costley-Wood, and accordingly findings of Misconduct by KPMG were made by the Tribunal in respect of the same matters.
One further allegation of misconduct made by the FRC was not upheld by the Tribunal.
In determining the sanctions, the Tribunal considered the Misconduct was very serious, noting that to a professional accountant the conflicts of interest should have been obvious and that the Misconduct risked the loss of significant sums of money. It put at risk Silentnight’s ability to survive and tens of millions of pounds of creditors’ claims, potentially exceeding £100 million as the liability to the Pension Scheme would crystallise. The Misconduct potentially adversely affected a significant number of people. The majority of the membership of the Pension Scheme comprised factory workers, many of whom had worked for Silentnight and contributed to the pension scheme for much of their working life. This was a foreseeable consequence of the plan to ‘dump’ the pension scheme into the PPF.
The Tribunal considered the Respondents’ Misconduct in respect of advancing or associating themselves with untrue, misleading or incomplete statements to the PPF, tPR, and the Trustees to be especially egregious given that they knew they had to be open and transparent with these parties and that they intentionally sought to mislead them in order to assist HIG in its efforts to enable Silentnight to shed its liability under the Pension Scheme as cheaply as possible.
The Tribunal further commented:
“The standards of integrity and objectivity are of fundamental importance. They express the most basic requirements that society expects of professional accountants. Members of the profession have a privileged and trusted role in society. In return, they are required to live up to their own professional standards. Society expects high standards from professional persons; and the professions expect high standards from their own members.”
Subsequent to the events outlined above, Silentnight went into administration on 7 May 2011 as a result of an entity related to HIG calling in the working capital facility. This culminated in the sale of the business out of administration to HIG, with the PPF assessing whether to assume responsibility for the Pension Scheme.
Costs
The Tribunal ordered that KPMG pay £2,450,000 towards Executive Counsel’s costs of the investigation together with the costs of the Tribunal (amounting to a further £305,814).
Elizabeth Barrett, Executive Counsel, said:
“The scale and range of the sanctions imposed by the Tribunal mark the gravity of the Misconduct in this matter. The decision serves as an important reminder of the need for all Members of the profession to act with Integrity and Objectivity and of the serious consequences when they fail to do so.”
The Report of the Tribunal is not published at this time.
*The Accountancy Scheme was amended from 1 January 2021 to remove from its jurisdiction all insolvency work (including restructuring advice, preparation for formal appointments and work consequent to formal appointments) carried out by members of the professional bodies who are licensed by those bodies as insolvency practitioners.