TIDMWTG
RNS Number : 0905U
Watchstone Group PLC
30 November 2021
THIS ANNOUNCEMENT CONTAINS INSIDE INFORMATION FOR THE PURPOSES
OF THE MARKET ABUSE REGULATION (EU) NO. 596/2014 ("MAR").
Watchstone Group plc
Claim filed against KPMG LLP
Watchstone Group plc (LON:WTG) ("Watchstone") announces that it
has served and filed a claim against KPMG LLP ("KPMG") in the High
Court.
The claim against KPMG is for GBP13.73m plus interest and arises
from KPMG's audit of Watchstone's (then Quindell's) financial
statements for the financial year ending 31 December 2013
("FY2013") ("Claim").
On 31 March 2014, Quindell announced its preliminary results for
FY2013, based upon the 2013 financial statements audited by KPMG
and signed off by the Quindell Board on 29 March 2014. KPMG
provided an unqualified audit report in respect of the FY2013
audit.
However, the FY2013 financial statements subsequently needed to
be very significantly restated, which they were, in the FY2014
financial statements published on 5 August 2015, which were also
audited by KPMG ("the Restated Accounts").
On the same day, the Financial Reporting Council ("the FRC")
announced that it had opened an investigation into KPMG and the
partner responsible for the FY2013 audit under the Accountancy
Scheme.
On 11 June 2018, the FRC announced that following its
investigation it had fined and reprimanded KPMG and the partner
responsible for handling the FY2013 audit, following their
admission of misconduct in relation to it. KPMG was reprimanded and
fined GBP4.5m (discounted for settlement to GBP3.15m). The admitted
misconduct is the subject of a document entitled "Particulars of
Fact and Admitted Misconduct" ("the PFAM").
The Claim is based primarily upon (although is not exclusively
limited to) the same heads of misconduct as were admitted by KPMG
and as are set out in the PFAM.
By its admitted misconduct under the Accountancy Scheme, and in
further respects as outlined in the Claim, Watchstone claims that
KPMG was negligent and/or breached its contractual and/or statutory
duties in the conduct of the 2013 audit.
As a result, Watchstone suffered loss in the sum of GBP13.73m
which it now claims in damages from KPMG.
The Particulars of Claim will be available on written
application to the Commercial Court, alternatively online at the HM
Courts & Tribunals e-filing Service: HMCTS e-filing service at
https://efile.cefile-app.com/login, subject to the payment of the
prescribed fee. The claim number is CL-2021-000673, High Court of
Justice, Queens Bench Division, Commercial Court.
Watchstone will make further announcements in due course, as
appropriate.
The release of this announcement has been authorised by Stefan
Borson, Group Chief Executive Officer and Company Secretary of the
Company.
For further information:
Watchstone Group plc Tel: +44 (0)7824
638 553
Stefan Borson, Group Chief Executive Officer
WH Ireland LLP, Financial Adviser and Broker Tel: +44 (0)20 7220
1666
Chris Hardie
IN THE HIGH COURT OF JUSTICE Claim No. CL-2021-000673
BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
COMMERCIAL COURT (QBD)
BETWEEN:
WATCHSTONE GROUP PLC
Claimant
- and -
KPMG LLP
Defendant
SUMMARY OF PARTICULARS OF CLAIM
Background
1. Watchstone (formerly known as "Quindell") is an English
public company currently trading on the Aquis Stock Exchange. It
was formerly well known for providing personal injury litigation
and related services.
2. Quindell engaged KPMG, the well-known accountancy and
professional services firm, to audit its financial statements for
the financial year ending 31 December 2013 ("FY2013").
3. Following the publication of the FY2013 accounts, Quindell
and its leadership were the subject of significant criticism in the
market and press in relation to its accounting policies,
specifically those concerning revenue recognition. The Chairman and
Group Finance Director also came under significant scrutiny for
dealings with their shares, and resigned. With a view to restoring
public and market confidence, Quindell's new leadership retained
PwC to carry out an extensive review of the business, with a
particular focus on its accounting policies as well as cash
generation. Following such review and further work Quindell
announced that it would be making significant changes to its
accounting policies, particularly those concerning revenue
recognition. It also retained experienced accountant consultants to
assist its leadership to consider the accounting policies in light
of the PwC report, and to implement the restatements of the
accounts.
4. The PwC review concluded that certain accounting policies
were unduly aggressive and/or inappropriate and, as a result, the
FY2013 financial statements needed to be very significantly
restated, which they were, in the FY2014 financial statements
published on 5 August 2015, which were also audited by KPMG ("the
Restated Accounts").
5. Unsurprisingly in the circumstances, on 5 August 2015, the
date of the publication of the Restated Accounts, the FRC opened an
investigation into KPMG in relation to its audit of Watchstone's
financial statements for FY2013.
Misconduct admitted by KPMG in relation to the relevant
audit
6. On 11 June 2018, the FRC announced that following its
investigation it had fined and reprimanded KPMG and the partner
responsible for handling the audit, following their admission of
misconduct in relation to it. The admitted misconduct is the
subject of a document entitled "Particulars of Fact and Admitted
Misconduct" ("the PFAM").
7. This claim is based primarily upon (although is not
exclusively limited to - see below) the same heads of misconduct as
were admitted by KPMG and are set out in the PFAM.
Admitted and other heads of breach
8. In summary the findings of the FRC, which now constitute
Watchstone's allegations of breach of contract/breach of duty of
care, were:
(1) The audit work in relation to recognition of revenue for
legal services did not comply with ISAs 200 and 500. KPMG failed to
obtain sufficient appropriate audit evidence to provide reasonable
reassurance that the use of the WIP model approach adopted by
Quindell enabled it to reliably to measure unbilled revenue, and
KPMG failed to exercise appropriate professional scepticism in
carrying out the audit. Accordingly, an unqualified audit opinion
should not have been given.
(2) The audit work in relation to Quindell's software business
did not comply with ISAs 200, 220 and 500, in that KPMG failed to
exercise sufficient scepticism and/or properly to obtain sufficient
appropriate audit evidence in relation to the question of whether
certain transactions concerning software were linked or arm's
length transactions at fair values. Watchstone makes a further
allegation concerning KPMG's failure to notice that an
inappropriate policy was applied to the part of its software
business relating to 'software as a service' or 'SaaS'.
9. Although those items alone had a significant effect on the
accounts and would be sufficient on their own to make out the
claims and losses relied upon by Watchstone, following scrutiny of
the FY2013 financial statements and related documents by it and its
expert, Watchstone also relies on further heads of breach, which
can be summarised as follows:
(1) KPMG's overall approach to the audit was errant in several
respects, not least in the failure to exercise professional
scepticism.
(2) As regards Quindell's medical and rehabilitation services
business, KPMG failed to recognise or point out to Quindell's board
that its accounting policies were inappropriate. Such policies had
to be changed in the Restated Accounts, resulting in significant
reductions in profit and revenue.
(3) KPMG failed properly to evaluate or point out to Quindell's
board, the inappropriate accounting treatment of a number of
transactions connected with the acquisition of businesses by the
Quindell Group, in three categories, namely (i) share-based
payments, (ii) share transactions, and (iii) equity swaps.
(4) KPMG failed to exercise professional scepticism, and/or to
obtain sufficient appropriate audit evidence in relation to whether
sales to companies that were subsequently acquired by Quindell were
genuine commercial transactions, and therefore whether and, if so,
how revenue from such sales should recognised.
Causation and loss
10. Watchstone says that it has suffered losses as a result of the breaches alleged as follows:
(1) Dividend (GBP6.18m) :
(a) Quindell had resolved in advance of the publication of the
FY2013 Accounts to pay a dividend to its shareholders conditional
upon its financial position as set out in those Accounts. Following
sign off by KPMG and release of its FY2013 financial statements, it
declared and subsequently paid a dividend on 2 May 2014, in the sum
of GBP6.18m.
(b) In reliance upon the audited FY2013 financial statements
Quindell believed that it had sufficient distributable reserves
under s.830 of the Companies Act 2006 to pay the dividend, and that
it was appropriate and prudent to do so. In fact, there was a
deficit of distributable reserves of GBP19.7m and the company was
heavily loss-making. Quindell therefore (i) could not legally,
and/or (ii) would not in fact, had it known the true position, have
paid the dividend.
(2) Excess KPMG audit fees (GBP2.089m) :
(a) KPMG applied a heightened internal risk profile to
Watchstone as a client, resulting in higher fees being payable for
its audit in the years following the restatement of the FY2013
financial statements. Such increased fees were the direct result of
the publication of the errant accounts, the need publicly to
restate them, and the FRC's investigation into KPMG.
(b) The fees charged by KPMG included work done on re-auditing
the FY2013 financial statements which, again, would not have been
necessary had the FY2013 financial statements been properly audited
in the first place.
(c) Watchstone's estimate of the amount attributable to the
enhanced risk profile and re-audit costs is GBP2.089m.
(3) PwC fees (GBP5.032m): In light of the reputational damage
caused by the public criticism of Quindell's accounting policies in
the FY2013 financial statements, Quindell instructed PwC to carry
out a review of its business, cash position and accounting
policies. Watchstone paid PwC a little over GBP5m for its
services.
(4) Consultants' fees : (GBP0.433m): Watchstone recruited, in
order to help it to deal with the fallout from the publication of
the FY2013 financial statements and the need to restate them,
experienced accounting consultants, which would not have been
necessary had the accounts originally been produced in the form in
which they appeared in the Restated Accounts. Accordingly,
Watchstone claims for the costs of three accounting professionals
each for a time limited, specific period of work.
11. The total sum that Watchstone claims is therefore
GBP13,734,922, plus interest.
MARK TEMPLEMAN Q.C.
WATSON PRINGLE
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END
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