Deloitte given record £14m fine over MG Rover/Phoenix affair

Watchdog punishes accountants for conflicts of interest advising car firm and Four who bought it

Deloitte was yesterday punished with a record £14m fine from the UK’s accountancy watchdog for failing to manage conflicts of interest over their advice to the doomed car maker MG Rover.

The Financial Reporting Council’s independent tribunal also severely reprimanded the firm for its conduct over MG Rover, which crashed into administration in 2005 with debts of £1.4bn and 6,000 job losses. Its report said: “The public must be protected from misconduct of this nature.”

Four MG Rover directors – the “Phoenix Four” – set up the Phoenix company to buy the loss-making British car maker for a token £10 five years earlier. Deloitte and its partner and corporate finance expert Maghsoud Einollahi – personally fined £250,000 and banned from the profession for three years – both failed to properly manage conflicts of interest, the tribunal said. Mr Einollahi, who showed no “contrition or remorse” according to the report, has now retired and Deloitte has committed to pay his fine.

Jon Moulton, the head of private equity firm Better Capital, who led the previous unsuccessful Alchemy bid to buy MG Rover, said: “I’m actually surprised Deloitte defended the action as long as they did, maybe they thought it would go away. £14m sounds quite a lot but it is the take-home pay for around 10 of Deloitte’s partners.” He also criticised the amount of time taken to reach the verdict, and said: “You need fresh justice really.”

The fine dwarfs the previous highest penalty from the FRC, when PwC was hit with a £1.4m punishment for failing to pick up the fact that JP Morgan had not been keeping client money separate from its own. The watchdog found Deloitte and Mr Einollahi had acted as corporate finance advisers to firms involved with MG Rover and the Phoenix Four while Deloitte was also auditing MG Rover. The accountancy firm, one of the industry’s Big Four, was also accused of presenting itself as advising MG Rover when in fact it was advising the Phoenix Four.

Deloitte received more than £30m in fees for all its work on MG Rover between 2000 and 2005. But the complaints centred on two deals – Project Platinum and Project Aircraft – for which the accountant picked up £9.4m in fees. The two transactions involved buying loan books from Rover’s former owner BMW and a scheme to use tax losses from the Rover business to the benefit of the Phoenix Four.

The report said Deloitte had showed no signs of “co-operation, confession and contrition”. The FRC’s executive director for conduct, Paul George, said its verdict should be “essential reading for all members of the profession”. The FRC had originally wanted to fine Deloitte up to £20m but the accountant was pushing for a £1m penalty.

Deloitte has 28 days to appeal. A spokesman said its audit work had not been criticised and the ruling could have “negative implications” for the advice accountants can offer clients. He added: “We remain disappointed with the outcome of the tribunal and disagree with its main conclusions. As a firm we take our public interest obligations seriously in everything we do. We are disappointed that the efforts we and others made did not successfully secure the long term future of the MG Rover Group.”

Deloitte said it would continue discussions with professional bodies about the “potentially wide-ranging impact on the profession and wider business community” of the tribunal findings.

The English patient: a rescue that backfired

So what went wrong with MG Rover?

You might ask what went right. The last UK mass-market car maker was put up for sale by BMW in 2000. It had had enough of what was referred to as “the English patient” by the Germans. They kept the new “Mini” but were desperate to offload most of the rest.

Who were the buyers?

Initially Jon Moulton’s Alchemy Partners was at the front of the grid, promising a scaled-down operation. But that would have meant a lot of job losses. The “Phoenix Four”, led by former Rover manager John Towers offered a revival of the mass market car maker.

What happened?

Rover was sold for a tenner to Phoenix Venture Holdings, but also received a substantial “dowry” in the form of an interest-free loan from BMW. With no new models and sales falling, within five years administrators were called in. China’s Nanjing Automotive bought what was left. A small MG design and assembly rump is left.

But that’s not all, is it?

Oh no. The company might have gone pop, but the buyers did spectacularly well, sharing £42m. The Serious Fraud Office was called in, but didn’t get very far. The four voluntarily agreed to bans from running companies while denying any wrongdoing.

What about the Deloitte fine?

For its role advising it, failing to properly manage conflicts of interest, and to consider the “public interest”. Its audit work was not found wanting.

And the British car industry?

Actually, it’s doing quite nicely. Just under foreign management. There might be a lesson somewhere in that.

James Moore

Timeline

1884 The Rover name first appears in Britain, on a tricycle manufactured by Coventry’s Starley and Sutton Co.

1904 An eight-horsepower car marks the first car under the Rover marque.

1906 The Rover Car Company is founded.

1925 Morris Motors creates the MG brand, named after the Morris Garages factory in Oxford.

1967 Rover is acquired by Leyland Motor Corporation, which merges with British Motor Corporation, owner of Morris, Austin and Jaguar, in 1968.

1988 Rover and Land Rover, now the Rover Group Plc, are sold to British Aerospace for £150m

1994 BAe sells the Rover Group to BMW for a reported £650m profit.

2000 BMW splits up the Rover Group, keeping the Mini brand, selling Land Rover to Ford, and the remaining parts to Phoenix Venture Holdings for a tenner. MG Rover is born.

2005 MG Rover goes into administration following a failed buyout by Shanghai Automotive Industry Corporation. It is revealed that Phoenix executives had awarded themselves £31m in bonuses since 2000.