Watchstone Group PLC - Claim filed against KPMG LLP

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 £13.73m 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 £4.5m (discounted for settlement to £3.15m). 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 £13.73m 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:

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 (£6.18m):

(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 £6.18m.

(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 £19.7m 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 (£2.089m):

(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 £2.089m.

(3)     PwC fees (£5.032m): 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 £5m for its services.

(4)     Consultants' fees: (£0.433m): 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 £13,734,922, plus interest.

MARK TEMPLEMAN Q.C.

WATSON PRINGLE