Quindell Plc

PN 53/15

Introduction

The Financial Reporting Council (FRC) today announces the following matters in relation to Quindell Plc (the company):

• The Conduct Committee of the Financial Reporting Council (the Committee) has been reviewing the annual reports and accounts of the company.  This review was conducted in accordance with the Committee’s operating procedures for reviewing corporate reporting in order to secure compliance by companies with the financial reporting requirements of the Companies Act 2006 which includes IFRS.  The findings of the Committee in relation to this review are set out below.
• The FRC has also launched an investigation under the Accountancy Scheme into members and two member firms in relation to the preparation, approval and audit of the financial statements of the company for the period ended 31 December 2011 to the year ended 31 December 2013 and for the preparation and approval of the company’s interim results for the half year ended 30 June 2014.

Findings of the Committee

The Committee first wrote to the company on 20 March 2014 with regard to the 2012 report and accounts and extended the scope of its work on 30 September 2014 into certain aspects of the 2011 report and accounts. 

The principal issues raised by the Committee were the timing and amount of revenue recognised for claims management and related services, the acquisition of Quindell Limited by Mission Capital plc and the accounting for certain acquisitions and related transactions with TMC (Southern) Limited (“TMC”).

The company has today published its annual report and accounts for the year ended 31 December 2014.  These contain substantial restatements of prior year revenues, profits and net assets, including corrections and adjustments in response to the issues raised by the Committee. In this respect, note 3 to the company’s accounts explains that the company has:

• revised its accounting policy for claims management revenue recognition and certain related costs reducing 2013 revenue by £109 million and profit after tax by £130 million.
• corrected the accounting for the acquisition of Quindell Limited by Mission Capital to treat it as a reverse acquisition, reducing goodwill and net assets at 31 December 2012 and 2013 by £25 million.
• corrected the accounting for certain transactions entered into with TMC in 2011, which would have reduced revenue and profit for that year by £4 million.  This has had the effect of reducing net assets at 31 December 2012 and 2013 by £2 million.

The FRC notes that, in the light of market concerns and certain of the Committee’s questions, the company reviewed certain other aspects of its financial reporting for the periods prior to 31 December 2013 which resulted in additional adjustments that are also reflected in the annual report and accounts published today.  

The effect of all the restatements has been to turn the 2013 profit after tax of £83 million to a loss of £68 million and reduce reported net assets from £668 million to £446 million at 31 December 2013.

The Committee notes that the directors and auditor have reported that it has not been possible, so far, for them to determine that all material errors and omissions arising from historic transactions have been identified. The directors have provided the Committee with an undertaking to keep it informed and make such corrections as may be necessary.

In light of the positive actions taken by the directors in correcting the identified errors, amending accounting policies and providing their undertakings, the Committee is closing its review of the 2011 and 2012 report and accounts.

Investigation under the Accountancy Scheme

We will report as appropriate in due course on the outcome of the investigation under the Accountancy Scheme referred to in the opening paragraph.

Notes to editors:

1. The FRC is responsible for promoting high quality corporate governance and reporting to foster investment. We set the UK Corporate Governance and Stewardship Codes as well as UK standards for accounting, auditing and actuarial work. We represent UK interests in international standard-setting. We also monitor and take action to promote the quality of corporate reporting and auditing. We operate independent disciplinary arrangements for accountants and actuaries; and oversee the regulatory activities of the accountancy and actuarial professional bodies.
2. The Conduct Committee is a body authorised under the Companies Act 2006 (the Act) to review and investigate the annual accounts, strategic and directors’ reports of public and large private companies to see whether they comply with the requirements of the Act, including applicable accounting standards. Following implementation of the Accounting Regulation (EC) No. 1606/2002, this may mean compliance with UK or International Financial Reporting Standards.
3. Where breaches of the Act are discovered the Conduct Committee seeks to take corrective action that is proportionate to the nature and effect of the defects, taking account of market and user needs. Where a company’s accounts, strategic or directors’ report are defective in a material respect the Conduct Committee will, wherever possible, try to secure their revision by voluntary means.  If this approach fails, the Conduct Committee is empowered to make an application to the court under section 456 of the Act for an order for revision. To date no court applications have been made.
4. Paragraph 20 of IAS 18 ‘Revenue’ states that revenue arising from the rendering of services should be recognised when, among other things, the amount of revenue can be measured reliably, it is probable that economic benefits associated with the transaction will flow to the entity and the manner and terms of settlement have been agreed with the counterparty.
5. Paragraph 24 of IAS 18 states that the stage of completion of a transaction may be determined by a variety of methods and an entity uses the method that measures reliably the services performed.  Using the proportion that costs incurred to date bear to the estimated total costs of the transaction is not always the most reliable method.  Paragraph 26 states that when the outcome of the transaction cannot be estimated reliably, revenue shall be recognised only to the extent of the expenses recognised that are recoverable.
6. Paragraph 9 of IAS 18 requires that revenue should be recognised at the fair value of the consideration received or receivable. In some circumstances the fair value may be substantially different to the face amount. Where the receipt of consideration is dependent upon significant further actions by the entity which may take some time to resolve a willing buyer would likely demand a substantial discount before acquiring an individual receivable. 
7. Paragraph 7 of IFRS 3 ‘Business Combinations’ requires that the guidance in IFRS 10 ‘Consolidated Financial Statements’ be used to identify the acquirer - the entity that obtains control of the acquiree. Paragraphs B13 to B18 of IFRS 3 contain guidance on determining which party is the acquirer.  Paragraph B19 notes that a reverse acquisition occurs when the entity that issues securities (the legal acquirer) is identified as the acquiree for accounting purposes.   
8. Paragraph 51 of IFRS 3 requires the acquirer to identify any amounts that are not part of what the acquirer and the acquiree (or its former owners) exchanged in the business combination, ie amounts that are not part of the exchange for the acquiree. The acquirer recognises, as part of applying the acquisition method, only the consideration transferred for the acquiree and the assets acquired and liabilities assumed in the exchange for the acquiree. Separate transactions are accounted for in accordance with the relevant IFRSs.
9. The Conduct Committee maintains a Financial Reporting Review Panel (FRRP). The Chairman is Geoffrey Green and the Deputy Chairs are Joanna Osborne and Ian Wright. There are currently 21 other members drawn from a broad spectrum of commerce and the professions. Individual cases may be dealt with by a specially constituted Review Group of the FRRP.
10. In relation to disciplinary matters, the FRC is the independent, investigative and disciplinary body for accountants and actuaries in the UK dealing with cases which raise important issues affecting the public interest. In brief, the stages of the disciplinary process are:
    • Decision to investigate;
    • Investigation;
    • Decision whether to bring disciplinary proceedings against a Member Firm or Member and, if so decided, referral to Disciplinary Tribunal;
    • Tribunal hearing; and
    • Determination and imposition of sanction and/or costs orders.  
11. The FRC can start a disciplinary investigation in one of two ways: (i) the professional bodies can refer cases to the FRC; and (ii) the FRC may decide of its own accord to investigate a matter. The Conduct Committee will consider each case identified or referred to it and decide whether or not the criteria for an investigation are met.
12. Investigations are conducted by Executive Counsel and the Professional Discipline team within the Conduct Division. If disciplinary proceedings are commenced, Executive Counsel delivers a complaint to the Conduct Committee. The Conduct Committee then instructs the Convener to appoint a Disciplinary Tribunal.