“so that we can examine the audit work carried out by BDO, in circumstances set out below. The Administrators wish to investigate whether BDO breached the duties BDO owed to the companies. The Administrators also wish to investigate the information relevant to the audits which was provided to BDO by management and employees.”
“The Administrators require production of the files identified above so that the Administrators can establish the reasons behind the Company’s spectacular collapse into insolvency, and examine the work carried out by BDO in respect of the relevant audits, including its audit testing, to ascertain whether BDO has discharged the duties it owed to the Company. This will enable the Administrators to properly consider (inter alia) the accounting treatment of the long-term contracts that the Group entered into (including the changes associated with the adoption of IFRS 15 for the 2018 audit: see below). 61. The Administrators also require production of the files so that the Administrators can examine all information provided by the Company’s management and employees to BDO and how this affected the audits and reporting of the Company’s and Group’s financial results. If properly prepared and maintained, the audit files should record dialogue with management in the course of the audit. The Administrators are investigating the conduct of former officers and management of the Company and there is the possibility that information may have been withheld from or misrepresented by management. 62. The Administrators do not yet know whether there are claims to be pursued against BDO (or other parties) relating to the matters raised in this statement. The matters to which I have referred above suggest that there was a material misstatement of the Group’s financial position for the 2019 year end (and possibly prior years) and that the 2020 unaudited half year results were also misstated. The Administrators do not know whether (or the extent to which) the explanation of any misstatements is that BDO were in breach of their duties to the Company: or whether any misstatements may have resulted from the deliberate or other conduct of the Company’s management or employees. 63. The request for the audit files is, the Administrators consider, reasonably required by the Administrators to establish whether such claims exist, whether there are any defences and their prospects of success. Production of the audit files should enable the Administrators to establish these matters, as effectively and as inexpensively as possible. If claims against BDO and/or other parties exist, it appears that such claims may have value (and thus, if pursued successfully, result in recoveries for the benefit of creditors): I have referred above to the distribution paid in September 2020. The remuneration of the Company’s directors was also, in part, based on the Company’s financial performance. 64. Should there be any claims identified which the Administrators decide to pursue, litigation funding will be sought and, if appropriate, After The Event (ATE) insurance. By obtaining litigation funding and ATE insurance, the Administrators will protect the estates from any potential adverse costs risk whilst also pursuing what may be valuable assets. The Administrators’ assessment of whether any claims exist (against BDO or other parties), and the merits of any claim which may exist, is likely to be significantly assisted by sight of the relevant audit files, and the availability and terms of litigation funding and ATE insurance are likely to improved.”
“I am therefore of the opinion that the power of the court to make an order under section 236 is not limited to documents which can be said to be needed "to reconstitute the state of the company's knowledge" even if that may be one of the purposes most clearly justifying the making of an order. At the same time it is plain that this is an extraordinary power and that the discretion must be exercised after a careful balancing of the factors involved - on the one hand the reasonable requirements of the administrator to carry out his task, on the other the need to avoid making an order which is wholly unreasonable, unnecessary or "oppressive" to the person concerned. … The proper case is one where the administrator reasonably requires to see the documents to carry out his functions and the production does not impose an unnecessary and unreasonable burden on the person required to produce them in the light of the administrator's requirements. An application is not necessarily unreasonable because it is inconvenient for the addressee of the application or causes him a lot of work or may make him vulnerable to future claims, or is addressed to a person who is not an officer or employee of or a contractor with the company in administration, but all these will be relevant factors, together no doubt with many others.”
“KPMG, as the company's auditors, are most probably officers of the company within the meaning of s.236(2)(a) …” and that whilst such an interpretation might not give rise to claims against them as fiduciaries: “that cannot to my mind diminish the duty of an auditor unders.235 of the Insolvency Act 1986 to cooperate with office holders, a power to which Ralph Gibson LJ in Re British and Commonwealth Holding at page 372 attached importance, in addition to and separately from any subsisting fiduciary duty. ”
“it falls upon the liquidator to set out what enquiries/investigations have been made and the result of those which has therefore resulted in the application in order for him to complete the enquiries and fill in the gaps in the information about the company’s affairs, dealings and property.”
“Audit documentation that meets ISA 230 provides: ‘(a) Evidence of the auditor’s basis for a conclusion about the achievement of the overall objectives of the auditor; and (b) Evidence that the audit was planned and performed in accordance with ISAs (UK) and applicable legal and regulatory requirements’. For the purposes of ISA 230 “audit documentation” is: ‘The record of audit procedures performed, relevant audit evidence obtained, and conclusions the auditor reached (terms such as “working papers” or “workpapers” are also sometimes used). In the UK, audit documentation shall include all documents, information, records and other data required by ISQC (UK) 1 (Revised June 2016), ISAs (UK) and applicable legal and regulatory requirements’. An auditor is required to prepare audit documentation that is: ‘…sufficient to enable an experienced auditor, having no previous connection with the audit, to understand: (a) The nature, timing and extent of the audit procedures performed to comply with the ISAs (UK) and applicable legal and regulatory requirements; (b) The results of the audit procedures performed, and the audit evidence obtained; and (c) Significant matters arising during the audit, the conclusions reached thereon, and significant professional judgments made in reaching those conclusions.’ Further, ISA 230 requires the auditor to retain any other data and documents ‘that are important in supporting the auditor’s report as part of the audit documentation’. The audit files must also document: (a) ‘…discussions of significant matters with management, those charged with governance, and others, including the nature of the significant matters discussed and when and with whom the discussions took place’. (b) ‘If the auditor identified information that is inconsistent with the auditor’s final conclusion regarding a significant matter, the auditor shall document how the auditor addressed the inconsistency’.”
“An important factor in determining the form, content and extent of audit documentation of significant matters is the extent of professional judgment exercised in performing the work and evaluating the results. Documentation of the professional judgments made, where significant, serves to explain the auditor’s conclusions and to reinforce the quality of the judgment. Such matters are of particular interest to those responsible for reviewing audit documentation, including those carrying out subsequent audits when reviewing matters of continuing significance (for example, when performing a retrospective review of accounting estimates). A10. Some examples of circumstances in which, in accordance with paragraph 8, it is appropriate to prepare audit documentation relating to the use of professional judgment include, where the matters and judgments are significant: • The rationale for the auditor’s conclusion when a requirement provides that the auditor “shall consider” certain information or factors, and that consideration is significant in the context of the particular engagement. • The basis for the auditor’s conclusion on the reasonableness of areas of subjective judgments (for example, the reasonableness of significant accounting estimates). • The basis for the auditor’s conclusions about the authenticity of a document when further investigation (such as making appropriate use of an expert or of confirmation procedures) is undertaken in response to conditions identified during the audit that caused the auditor to believe that the document may not be authentic.” • The rationale for the auditor’s conclusion when a requirement provides that the auditor “shall consider” certain information or factors, and that consideration is significant in the context of the particular engagement. • The basis for the auditor’s conclusion on the reasonableness of areas of subjective judgments (for example, the reasonableness of significant accounting estimates). • The basis for the auditor’s conclusions about the authenticity of a document when further investigation (such as making appropriate use of an expert or of confirmation procedures) is undertaken in response to conditions identified during the audit that caused the auditor to believe that the document may not be authentic.” iii) It is clear to me, therefore, that having complied with their obligations under ISA 230, the Audit Files should provide a record of how BDO carried out its function as auditor, how it exercised professional scepticism and how it interrogated the evidence provided to it by the Companies. That record appears to be unique: there is no suggestion in BDO’s evidence that all issues its auditors considered and all of its reasoning for the conclusions reached were shared with the Companies. The importance of considering this record, when assessing whether BDO met its duties as auditor, can be seen from BDO’s completion report. For 2018 it states: “For a risk based selection of contracts from each operating segment, supported by a further sample of other contacts, we obtained a copy of the contract documentation and critically assessed and challenged the recognition of revenue from a review of the performance of the contract. In particular, we have: • assessed the accuracy of the adoption of IFRS 15, focussing particularly on the timing of and amounts recognised in respect of variable income (as highlighted by the detailed assessment carried out by management on the adoption of IFRS 15 as being the most significant area of change). We also assessed the contracts tested for any other indicators that may be affected by IFRS 15 such as the restriction of revenue recognition where the ultimate collectability may be in doubt. • we have substantively tested the revenue figures as applied to the contracts throughout the year.” • assessed the accuracy of the adoption of IFRS 15, focussing particularly on the timing of and amounts recognised in respect of variable income (as highlighted by the detailed assessment carried out by management on the adoption of IFRS 15 as being the most significant area of change). We also assessed the contracts tested for any other indicators that may be affected by IFRS 15 such as the restriction of revenue recognition where the ultimate collectability may be in doubt. • we have substantively tested the revenue figures as applied to the contracts throughout the year.” iv) Having seen the significant adjustments that were subsequently made to the contract revenue figures, in my judgment it is entirely reasonable for the Applicants, in order to meet their duty to the Companies’ creditors, to seek to see how the revenue figures were “substantively tested” by BDO, which contracts were selected for testing and how they critically assessed the Companies’ revenue recognition. v) In my judgment, it is only by seeing the Audit Files, that the Applicants can reach a reasonably informed, preliminary view as to whether BDO met its duties as auditor to the Companies. I reject the suggestion that because the identified misstatements and adjustments primarily related to water contracts, their request is too wide. Errors in one part of the audit may be replicated in others. Responsibility for such errors, may lie entirely with the Companies’ management and/or not give rise to any actionable claim against BDO. But the Applicants will not know that until they see the Audit Files. I see no reason to restrict disclosure of the Audit Files to those elements that concern the water contracts. vi) It follows that I consider that the Audit Files are more likely than not to comprise an important record of the information provided to BDO by the Companies’ management team and employees. Whilst BDO has correctly stated that such information should already be at the Applicants’ disposal, Ms Wade’s evidence explains that the Applicants recovered electronic data totalling approximately 80 terabytes. The Company had over 500 email accounts and multiple stores of files. Ms Wade provides an indication of the enormous costs that would be involved in seeking to host all of the information. I accept from her uncontested evidence that the Applicants do not have sufficient knowledge of the manner in which the Company’s management engaged with the audit process to enable them reliably to target a search of the email accounts to establish all the information that was being given to BDO for the purposes of the audit. I am also satisfied that it is more likely than not that the Companies may not have any record of some or perhaps all of the information that was provided orally to BDO. vii) By contrast, BDO’s Audit Files were prepared specifically to keep all of the documents that were pertinent to each audit, in one place. It is more likely than not (and again I note that BDO has provided no evidence to the contrary) that the bulk of the Companies’ emails regarding each audit, and (to the extent that any existed) BDO’s attendance notes of information provided orally, will have been kept on the relevant Audit File. The Audit Files should thus together provide among them, a full record of all information requested from and provided by the Companies. viii) The documents comprising the 2019 Audit File were checked for the purposes of protecting BDO’s privileged information before being delivered to the FRC. Whilst Mr Roberts states that a similar exercise would need to be undertaken in respect of the 2018 Audit File, the evidence suggests that the extent of such an exercise pales in comparison with the potential cost of seeking to identify every employee at the Company involved in the provision of information to BDO for the purposes of the 2018 Audit and then, taking into account the additional IT difficulties set out in Ms Wade’s evidence, searching their email addresses. The authorities clearly establish that one of the purposes of section 236 is to enable an insolvency office-holder who comes to a company as a stranger, as cost effectively as possible, to gain an understanding of its assets and liabilities. The assets in this case are potential claims against BDO and members of the Companies’ management teams and the evidence shows that it would be more cost-effective to obtain the relevant information to enable an assessment of the merits of any litigation, from the Audit Files than by trying to reconstitute all of the Companies’ records in a searchable format. ix) When considering the potential prejudice or oppression to BDO in having to comply with such an order, I am not aware of any authority, I was taken to none, nor can I see any good reason why one would exist that provides that notwithstanding the court’s wide discretion when considering whether to make an order under sections 235 and 236 of the Act, that discretion should now be restricted or limited in some way, as a result of the introduction of the Protocol. The Applicants were appointed long after the audits in question and after the departure of key members of the Companies’ management team engaged in those audits. This, in part, is the reason why, according to the Applicants’ evidence, they have not yet been able to determine whether a claim may even lie against BDO. x) I do not consider the Applicants’ request to be too wide or general. It is not asking for every document that ever passed between the Companies and BDO. It seeks a targeted order to see files which BDO’s evidence describes as “self-contained”