Au­di­tor un­der fire over £237m mini-bond scan­dal

Daily Mail - - City & Finance - by James Bur­ton

ONE of Bri­tain’s top bean­coun­ters ap­par­ently missed ‘highly sus­pi­cious’ trades at col­lapsed in­vest­ment firm Lon­don Cap­i­tal & Fi­nance (LCF) be­fore it went bust.

Ernst & Young (EY) served as au­di­tor for LCF and gave its ac­counts a clean bill of health.

But ear­lier this year LCF went bust owing £237m to 11,500 cus­tomers, many of whom had in­vested their life sav­ings in its un­reg­u­lated so- called ‘mini-bonds’.

Four peo­ple have been ar­rested by the Se­ri­ous Fraud Of­fice, while ad­min­is­tra­tors said that cus­tomers’ cash had flowed through the per­sonal bank ac­counts of peo­ple con­nected to the busi­ness.

The cus­tomers may now face a tax bill be­cause their sav­ings were not be­ing held in ISAs – even though many thought they were.

The rev­e­la­tions pile fresh pres­sure on the au­dit pro­fes­sion, which has been ac­cused of miss­ing ev­ery­thing from the im­pend­ing col­lapse of out­sourcer Car­il­lion to fraud at Patis­serie Va­lerie. Ac­count­ing ex­pert Pro­fes­sor Prem Sikka, of the Univer­sity of Es­sex, said: ‘Au­di­tors are mired in con­flicts of in­ter­est and there’s no real change.

‘The usual game con­tin­ues and in­no­cent by­standers con­tinue to suf­fer as a re­sult. Ev­ery­body in­volved in this case who should have acted to in­tro­duce some kind of san­ity failed – au­di­tors failed, man­agers failed and the reg­u­la­tors failed.’

EY signed off on LCF’s ac­counts for the year to 2017. The pre­vi­ous year, when it was a much smaller busi­ness, its books were checked by PwC.

Both said the firm was keep­ing ac­cu­rate records and fol­low­ing the rules. But LCF, which tar­geted or­di­nary savers by of­fer­ing them high re­turns of 8pc on its ‘mini-bonds’, col­lapsed in March after the Fi­nan­cial Con­duct Author­ity banned it from tak­ing on any new busi­ness.

In­vestors are ex­pected to get just 20pc of their money back.

Smith & Wil­liamson, the ad­min­is­tra­tor ap­pointed to try to re­cover lost funds, said that the cash was in­vested in just 12 com­pa­nies, many of them with close con­nec­tions to LCF’s founder Si­mon Hume-Ken­dall and his as­so­ciates.

Savers’ money had been pumped into a con­vo­luted web of busi­ness in­ter­ests, stretch­ing from Cor­nish hol­i­day cot­tages and land on a Cape Verde is­land to a rac­ing sta­bles and even a he­li­copter.

S&W said: ‘There are a num­ber of highly sus­pi­cious trans­ac­tions in­volv­ing a small group of con­nected peo­ple which have led to large sums of the bond­hold­ers’ money end­ing up in their per­sonal pos­ses­sion or con­trol.’

Both EY and PwC have been in­volved in a range of pre­vi­ous scan­dals. EY failed to spot im­pend­ing catas­tro­phe at Lehman Broth­ers, the US bank whose col­lapse trig­gered the 2008 fi­nan­cial cri­sis, and is un­der in­ves­ti­ga­tion for its role au­dit­ing Dan­ish lender Danske Bank dur­ing a £170bn money laun­der­ing scan­dal in Es­to­nia.

PwC missed a £326m ac­count­ing er­ror at Tesco, over­looked mis­takes at fi­nan­cial ad­viser RSM Tenon, and even presided over a mix-up at the 2017 Os­cars which saw the wrong film named best pic­ture.

PwC and EY worked for Car­il­lion be­fore it went bust last year.

The two firms are reg­u­lated by the Fi­nan­cial Re­port­ing Coun­cil watch­dog, which is be­ing scrapped for fail­ing to prop­erly hold au­di­tors to ac­count.

But the FRC does not in­ves­ti­gate is­sues at small com­pa­nies not listed on the stock mar­ket. These in­ves­ti­ga­tions are typ­i­cally left to the Char­tered In­sti­tute of Ac­coun­tants in Eng­land and Wales, a trade group funded by the in­dus­try.

Both EY and PwC de­clined to com­ment last night.

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