MP accuses accountants of cashing in on recession

The SNP's Mike Weir says that insolvency fee levels need to be investigated

A Scottish MP is calling for an investigation into Britain's insolvency industry amid growing concern about the fees that leading accountancy firms are earning during the recession.

Scottish Nationalist Party regulatory spokesman Mike Weir accused accountancy firms of cashing in at the expense of the creditors of companies that have gone under – and of benefiting from a lax regulatory system that enables them to spend years winding up companies while continuing to earn fees.

Figures published before Christmas revealed that more than 20,000 businesses have gone under during this recession, more than in any other slowdown. Estimates of the fees earned by administrators run as high as £20bn.

Mr Weir said his concern about the industry had initially begun when he looked at the plight of victims of the collapse of Farepak, the Christmas hamper company that went under in October 2006, putting at risk £37m of savers' cash. He said those savers had been forced to wait three years for the administrators to complete their wind-up of the company – they are likely to get back only 5p in the pound, while the accountants and their legal advisers could earn as much as £5m.

Such sizeable fees are not unusual. Zavvi, the music retailer that went under earlier this year, owed its creditors £185m – they have been told to expect a return of between 5p and 10p in the pound, while Ernst & Young, the administrator, has so far earned £3.2m in fees. The administration of Land of Leather, which went under at the beginning of the year, earned Deloitte & Touche some £2.5m and returned only 9p in the pound to the furniture retailer's creditors.

There are also concerns about potential conflicts of interest for accountancy firms, which also compete for contracts to advise struggling businesses on their finances.

Last month, Sir Geoff Mulcahy, the former boss of Woolworths, who last year tried and failed to put together a rescue package for the retailer, pointed to the dual role played by Deloitte at the company.

"If you have a situation like Woolworths where the administrator is both the financial adviser and then turns out to be the administrator, the fact is he would earn a few hundred thousand pounds for advising on backing the management and restructuring the business." Sir Geoff said.

"Yet he and his agents would earn many millions of pounds by liquidating the business. Therefore there must be a perceived conflict of interest."

Leading accountants reject any accusations of such conflicts and also insist that their industry is well-regulated.

However, Mr Weir said he could not understand why there were no rules governing how much administrators could charge for administrations, or time limits on how long they should take.

He pointed to the case of holiday firm Apal Travel, which went into liquidation in 1974 but only saw its wind-up completed in September of this year. Creditors did get back 74p in the pound but many had died while waiting for their money. More than 19,500 liquidations were started five years ago but have still not been finished. Of liquidations begun 20 years ago or more, almost 7,000 still have not been finalised.

Mr Weir said: "The UK Government must take a serious look at the workings of the insolvency industry that appears to be raking in a fortune at the expense of creditors."

He added: "There is something seriously wrong when liquidations can take a generation to finalise and people are actually dying before the insolvency gravy train comes to a halt.

"Part of the problem seems to be that the industry is largely self-regulated. Insolvency work is handled by licensed practitioners, most of whom work for accountancy firms.

"The practitioners are in turn regulated by accountancy and law professional bodies, which have no independence from the firms they regulate. What's more, there is no independent complaints investigation procedure or ombudsman to adjudicate on malpractices – there are no questions over fees or delays."

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