So the Ghost of Christmas Past has come back to haunt Ernst & Young.
It is seven years since the Christmas savings club Farepak collapsed, taking £37 million of its customers' money with it, blighting their festive season, and now it is the turn of the firm's one-time accountants to feel the pain. The Financial Reporting Council (FRC) has fined Ernst & Young £750,000 for failing to meet the required standards in their auditing of Farepak and ordered it to pay £450,000 in costs. Alan Flitcroft, who carried out the audit, has personally been fined £50,000.
This confirms the suspicions of those who have believed all along that something went badly wrong in the auditing of Farepak. It is nevertheless astonishing it has taken until now to formally declare the failure.
The Farepak saga has dragged on interminably and will not have restored anyone's faith in the financial services industry, to put it mildly. The emergence of substandard accounting in this Dickensian tale of self-serving bankers on the one hand and innocent depositors on the other makes it all the more unedifying.
Ernst & Young, no doubt eager to limit damage to its reputation, has been at pains to point out that the FRC did not allege any "causative link" between the accountants' conduct and Farepak's going into administration. No, but the FRC did say that, in relation to Farepak's financial statements from financial year 2005, the accountants "failed to properly consider Farepak's ability to continue as a going concern". Attempts to deflect criticism will not wash with depositors. If Ernst & Young had done its job properly, who knows how things might have been different?
Farepak's customers were mainly low-paid women. When the firm collapsed in 2006, 116,400 of them, including 25,000 in Scotland, lost the lot and because Farepak offered Christmas hampers, vouchers and stamps, which are not classed as financial products, customers did not qualify for the protection offered to bank or building society customers under the Government's Financial Services Compensation scheme.
In December 2006, a distress fund raised £6m including £2m from HBOS (now part of Lloyds Banking Group), the bank of Farepak's parent company European Home Retail. In April 2010, Farepak directors paid a further £4m from their own pockets, but it was only in summer 2012, after a judge criticised HBOS's handling of the debacle, that the bank - which is said to have clawed back many millions from Farepak - was shamed into giving £8m more. The judge was scathing of the bank for making Farepak continue collecting deposits, even when it was expected to go bust, when the bank itself would be the beneficiary.
Ernst & Young is not HBOS; nevertheless, this latest case is yet another in which firms or small individual investors have been let down by financial services companies, be they banks or accountancy firms. A £750,000 fine is enough to hurt, and is a reminder that such firms must earn their fees or face the consequences. The company should now donate a further £750,000 to Farepak customers to prove that the lesson has been learned.
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