Auditor under fire over £237m mini-bond scandal

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.