KPMG used ‘untruthful defence’ in Silentnight inquiry, says watchdog

Report reveals unprecedented rebuke of ‘big four’ accountant after senior partner found to have lied

Last modified on Wed 13 Oct 2021 12.19 EDT

One of KPMG’s senior partners lied in an investigation into the scandal over the bed company Silentnight’s insolvency, according to an unprecedented rebuke of a big four accountant from the regulator.

The Financial Reporting Council (FRC) said KPMG and David Costley-Wood, a partner at the firm, used an “untruthful defence” in an investigation into the sale of Silentnight to a private equity firm in 2011.

A tribunal previously found KPMG had an “obvious conflict of interest” as it advised Silentnight and the US private equity firm HIG. Silentnight was placed into administration in 2011, allowing HIG to buy the company without the burden of a large pension scheme.

It was the first time the regulator had ever found that an accounting firm used an untruthful defence, as a report published on Wednesday detailed the reasons behind a £13m fine for KPMG announced in August. Costley-Wood, who was formerly head of KPMG’s Manchester restructuring division, was also fined £500,000 and barred from insolvency or accountancy licences for 13 years.

Costley-Wood argued to the tribunal that Silentnight was on a “burning platform” and would inevitably collapse. The tribunal said this was “untruthful in that he did not believe that there was a burning platform throughout the material period”. That defence was “a construct invented by him to assist in his defence”, the tribunal said.

The case has raised serious questions over KPMG’s handling of conflicts of interest, as well as its lack of cooperation with investigators into the affair in the decade since.

Elizabeth Barrett, the executive counsel for the FRC’s disciplinary tribunal, said: “KPMG and Mr Costley-Wood compounded their serious misconduct by advancing a defence to proceedings which was partly untruthful and by failing to cooperate with the investigation.”

The tribunal found repeated evidence of KPMG failing to cooperate fully. KPMG repeatedly claimed Costley-Wood had not used a personal email address to carry out work, only to admit the existence of emails five years later, while KPMG’s lawyers, Linklaters, handed over a separate trove of 2,367 documents only in February 2021 owing to an “error”.

On another occasion KPMG failed to hand over relevant documents because an employee typed “Costly” rather than Costley-Wood in a search. Costley-Wood was also found to have backdated notes of a meeting.

The tribunal found KPMG and Costley-Wood endangered the savings of members of Silentnight’s pension scheme, many of whom were relatively low-earning workers in the bed company’s factories. In March HIG paid a £25m settlement to the Pensions Regulator after it alleged the private equity company “deliberately brought about the unnecessary insolvency of the original Silentnight Group in order to buy its business out of administration, while leaving its defined benefit pension scheme behind”.

HIG retained close links with KPMG’s restructuring division, despite the scandal. In March 2021 HIG bought the division from KPMG, spinning it out into a new business called Interpath Advisory.

Jon Holt, KPMG UK’s chief executive, said: “This report makes difficult reading. We accept the findings of the tribunal, and we regret that the professional standards we expect of our partners were not met in this case and that it has taken over a decade to reach this point.

“We no longer provide insolvency services and we have improved our broader controls and processes significantly since this work was performed in 2010. We will reflect on the tribunal’s findings carefully and ensure that we learn lessons to reinforce our focus on building trust and delivering work of the highest quality.”

Costley-Wood left KPMG and the accountancy profession in June before the FRC announced the fine, according to earlier reports and a social media profile. He was approached for comment.

A spokesperson for Interpath said: “Now that we are no longer part of KPMG and as such, have not been involved in these proceedings, we cannot comment.” HIG was approached for comment.

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