KPMG UK fined £13m over Silentnight sale to private equity

KPMG in the UK has been fined £13 million (€15.3 million) and ordered to pay more than £2.75 million in costs by an independent tribunal over serious misconduct in its role in the sale of bed manufacturer Silentnight to a private equity fund.

The fine falls just short of the £15 million penalty - a UK record - imposed on Deloitte last year for failings in its audits of former FTSE 100 software company Autonomy. It is the latest blow to KPMG, which was criticised by the UK accounting regulator last month for the “unacceptable” quality of its banking audits.

The disciplinary tribunal found in June that KPMG and one of its partners failed to comply with the UK accounting profession’s fundamental principles of objectivity and integrity when they advised on the sale of Silentnight to US private equity firm HIG Capital through a prepack administration in 2011.

The findings followed a four-week hearing in which the Financial Reporting Council argued that KPMG had helped HIG to drive UK-listed Silentnight into an insolvency process so the private equity group could acquire the company without the burden of its £100 million pension scheme.

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The tribunal described the history of KPMG’s involvement in the case as “deeply troubling” and concluded that the accounting firm wanted to maintain good relations with HIG, which it was nurturing as a potential client.

KPMG was found to have acted in the interests of HIG, which were “diametrically opposed” to those of its client Silentnight.

KPMG and David Costley-Wood, the partner who advised Silentnight on the sale, were also found to have shown a lack of integrity because of Costley-Wood’s dishonesty in his dealings with the Pension Protection Fund and the UK Pensions Regulator.

Reprimand

In addition to the financial sanctions, KPMG was severely reprimanded by the tribunal. It was ordered to appoint an independent reviewer to investigate why threats to its objectivity were not identified and to examine a sample of other previous cases to check for similar failings. The reviewer will also examine the firm’s policies and training programmes in light of its findings.

KPMG had argued before the tribunal that it should not be forced to review its current procedures or the causes of the Silentnight misconduct but said on Thursday that it welcomed the review process.

The FRC had asked the tribunal to fine KPMG more than £15 million while the Big Four firm had argued for the penalty to be capped at £5 million.

Costley-Wood, who retired from KPMG in June, was fined £500,000, severely reprimanded and excluded from holding an insolvency licence or being a member of the Institute of Chartered Accountants in England and Wales (ICAEW). KPMG confirmed that it would pay on Costley-Wood’s behalf.

The PPF, the lifeboat for members of failed company pension plans, said on Thursday that the fines, which are due to be paid to the ICAEW, should be used to plug the shortfall in the Silentnight retirement scheme.

The scheme’s 1,200 members, including factory workers and shop floor staff, face cuts to their pension income because they will be transferred to the PPF.

In March the Pensions Regulator announced a £25 million settlement against HIG over allegations the group had deliberately caused the unnecessary insolvency of Silentnight so it could buy the business out of administration while shedding its pension scheme liabilities.

The settlement was paid to Silentnight’s pension scheme but was not enough to clear the funding shortfall and keep members out of the PPF.

The ICAEW, which is partly funded by fees from accounting firms, said it had not received any contact from the PPF but that its board had declined a request from the pension scheme trustees last month to use the proceeds of the fine to help its members.

The ICAEW said the fines were “not a windfall” for the organisation because professional bodies are required to fund regulatory investigations up front, including where no fine is ultimately imposed.

HIG went on to complete the purchase of KPMG’s restructuring division, which advised on the Silentnight sale, in May this year in a deal worth more than £350 million.

“We acknowledge the tribunal’s findings and regret that the professional standards we expect of our partners and colleagues were not met in this case,” KPMG UK said.

“Mr David Costley-Wood has retired from the firm and whilst we no longer provide insolvency services, our broader controls and processes have evolved significantly since this work was performed over a decade ago,” it added.

KPMG said it would not appeal against the sanctions.

- Copyright The Financial Times Limited 2021