There are three groups that carry responsibility for this situation and should each be the subject of litigation by KPMG to recover the missing funds. They are the Auditors, the Directors and the FSA themselves.
The Auditors
The Auditors appear to have completely failed to carry out the duties expected of an Auditor. The reconciliation of client balances with the actual cash held is just so basic an Audit function for a spread betting company that it beggars belief that they failed to do so. Also, the accounts have been presented in such a way that can only have been intended to mislead. The cash position of the company is presented as an aggregate figure, a mix of client and company cash! as if the client cash was the company`s IG Group in contrast only put company money in the balance sheet, not client money IG state in their accounts that "Segregated client money accounts hold statutory trust status restricting the Groups ability to control the monies and accordingly such amounts are not held on the Groups Statement of Financial position”. How could Ernst and Young have allowed WS to have presented client money as a company asset on the Worldspreads Statement of Financial position?
Also, WS don't disclose the balances held at Brokers in the accounts. This is because the margin calls would often exceed the reported company cash level and so would have made it obvious that the margins posted for hedges must have come from client balances. There must have been lots of people within WS who knew full well that the margins being posted into the market exceeded the reported company cash level. In the Feb 28th trading statement the company said it had 7m EUR of cash(£6m), but it must have been obvious to anyone in the firm, and in the brokers and at the FSA that the margins required for the hedges exceeded this amount.
The Directors
In the UK a Director of an FSA registered firm has a legal responsibility a) not to trade while insolvent and b) To ensure client assets are segregated. Some of these Directors knowingly breached these obligations while others failed to do their jobs with sufficient care to prevent it. In particular, what are Non Executive Directors for if it is not to ensure that the Executive Directors are running the company properly? Too many Non Execs see their role as banking the £50K a year for attending 4 Board meetings a year and quaffing champagne at Cheltenham. They completely failed to protect anyone. What questions did they ask? What reassurances did they seek?
The FSA
The FSA rules on client segregation are a joke. Their very existence is worse than not having them if the FSA are not going to ensure that it happens. Any client seeking reassurance about the safety of their money held at Worldspreads was told that their money was completely safe because it was segregated and in the event of Worldspreads going bust, client money was ring fenced. The result was that many clients kept balances at Worldspreads that they simply would not have done if they thought that a Worldpreads bankruptcy would take their money with them. The FSA reassurance led to many investors leaving more money with Worldspreads than they would have done if the rules were not there. IF the FSA are not going to make sure the rules are followed they are actually RAISING the prospect of client losses, not reducing them, by creating a false sense of security and an opportunity for a dodgy company to reassure a sceptical client. If the FSA segregation rules had not existed I would not have deposited as much money as I did with them.
The scale of the negligence by so many parties in this sorry affair suggests that KPMG should be looking to recover the FULL shortfall from the guilty parties. Most of the Directors and Auditors have liability insurance and so I urge KPMG to instigate litigation ASAP
The Auditors
The Auditors appear to have completely failed to carry out the duties expected of an Auditor. The reconciliation of client balances with the actual cash held is just so basic an Audit function for a spread betting company that it beggars belief that they failed to do so. Also, the accounts have been presented in such a way that can only have been intended to mislead. The cash position of the company is presented as an aggregate figure, a mix of client and company cash! as if the client cash was the company`s IG Group in contrast only put company money in the balance sheet, not client money IG state in their accounts that "Segregated client money accounts hold statutory trust status restricting the Groups ability to control the monies and accordingly such amounts are not held on the Groups Statement of Financial position”. How could Ernst and Young have allowed WS to have presented client money as a company asset on the Worldspreads Statement of Financial position?
Also, WS don't disclose the balances held at Brokers in the accounts. This is because the margin calls would often exceed the reported company cash level and so would have made it obvious that the margins posted for hedges must have come from client balances. There must have been lots of people within WS who knew full well that the margins being posted into the market exceeded the reported company cash level. In the Feb 28th trading statement the company said it had 7m EUR of cash(£6m), but it must have been obvious to anyone in the firm, and in the brokers and at the FSA that the margins required for the hedges exceeded this amount.
The Directors
In the UK a Director of an FSA registered firm has a legal responsibility a) not to trade while insolvent and b) To ensure client assets are segregated. Some of these Directors knowingly breached these obligations while others failed to do their jobs with sufficient care to prevent it. In particular, what are Non Executive Directors for if it is not to ensure that the Executive Directors are running the company properly? Too many Non Execs see their role as banking the £50K a year for attending 4 Board meetings a year and quaffing champagne at Cheltenham. They completely failed to protect anyone. What questions did they ask? What reassurances did they seek?
The FSA
The FSA rules on client segregation are a joke. Their very existence is worse than not having them if the FSA are not going to ensure that it happens. Any client seeking reassurance about the safety of their money held at Worldspreads was told that their money was completely safe because it was segregated and in the event of Worldspreads going bust, client money was ring fenced. The result was that many clients kept balances at Worldspreads that they simply would not have done if they thought that a Worldpreads bankruptcy would take their money with them. The FSA reassurance led to many investors leaving more money with Worldspreads than they would have done if the rules were not there. IF the FSA are not going to make sure the rules are followed they are actually RAISING the prospect of client losses, not reducing them, by creating a false sense of security and an opportunity for a dodgy company to reassure a sceptical client. If the FSA segregation rules had not existed I would not have deposited as much money as I did with them.
The scale of the negligence by so many parties in this sorry affair suggests that KPMG should be looking to recover the FULL shortfall from the guilty parties. Most of the Directors and Auditors have liability insurance and so I urge KPMG to instigate litigation ASAP
I had a six figure sum with Worldspreads and so I am not fully covered by the compensation scheme.I had concentrated so much into Worldspreads because Worldspreads had the lowest spreads and I felt confident that the FSA segregation rules would protect me.I feel terribly let down and if the Administrators can raise money from litigation then that would at least go some way to mimimising my losses.
ReplyDeleteIn my view all retail client money should be protected by the Industry financed compensation scheme, not just £50,000.A retail client,even a large one with over £50,000 is simply not in the position to be able to do their own due diligence and has to rely completely on the FSA,Auditors and Directors to protect them.And when they fail to do so they should not be allowed to wash their hands of the situation.
ReplyDeleteWe must all write to KPMG demanding that they launch legal action to recover the money.Just because there is a compensation scheme does not mean the guilty should get off the hook.
ReplyDelete