18th Nov, 2018

INVESTIGATION: Wasps fail to come clean with public over 'falsified evidence' and 'overriding' management controls to falsify accounts

Les Reid 10th May, 2018 Updated: 11th May, 2018

WASPS are refusing to come clean publicly after last week’s astonishing revelations from auditors PwC that “evidence” was “falsified” following an “override of management controls” to massage the accounts, amid the rugby club’s ongoing financial troubles.

The damning findings by PricewaterhouseCoopers (PWC) – exclusively revealed on our website and front page – concern attempts to mislead the public and Wasps’ bondholders about the company’s revenues and financial health.

PwC is now resigning as independent auditors to the Wasps group.

PwC’s auditor statement also concludes there is “material uncertainty” over whether Wasps can continue as a “going concern”.

The price for Wasps bonds propping up the club – with bondholders holding £35million of Wasps debts – has also fallen in recent days on the London Stock Exchange.

Our investigation has since raised questions with Wasps, PWC, the Stock Exchange, regulators, enforcement agencies and Coventry City Council following the auditor’s statement, published last week in Wasps’ belatedly filed accounts.

“Falsification” of evidence and an “override of management controls” – by any industry and standard definition – raises the potential for fraud, as described in guidance published by audit regulator the Financial Reporting Council.

We have invited Wasps to explain to the public – for the first time – more about PwC’s report of falsified evidence and an override of management controls, with Wasps bonds being traded to the public on the London Stock Exchange.

We have asked Wasps – in the public interest – precisely what appropriate steps have been taken, or will be taken, by either Wasps or external bodies to prevent such an episode happening again.

We have asked who was responsible for the falsification of evidence and the override of management controls, or whether Wasps contests the auditor’s conclusions.

We asked if Wasps had notified any external agencies, as guidance states companies have a duty to consider doing in certain circumstances. This was also made clear to us by the FRC and the Institute of Chartered Accountants in England and Wales (ICAEW).

Wasps have so far declined to publicly respond to our questions.

As we reported, PwC’s auditor statement – which accompanies Wasps Holding Limited’s newly filed late accounts for 2016/7 – disclosed the episode of a £1.1million “capital contribution from the group’s shareholder being incorrectly treated as revenue based on evidence which was found to have been falsified following override of certain management controls.”

As a result of this being discovered, PwC adds an “audit adjustment” – with the £1.1million subsequently being taken out of revenue – resulted in Wasps breaching a ‘covenant’ pledge to its bondholders.

The covenant related to the company’s real EBIDTA earnings, and its ability to pay bondholders annual interest of £2.2million a year.

As we reported, Wasps had informed bondholders in December last year that it had broken the ‘covenant’ pledge to them, and sought bondholders’ permission to modify the covenant. It says this was agreed at a bondholder meeting in January.

But Wasps’ public document notifying bondholders in December last year DID NOT notify bondholders of any falsification of evidence or override of management controls.

Instead, it only reported there had been “certain accounting irregularities” and “improper accounting”.

We have asked Wasps if bondholders were therefore further misled.

This public document of December 21 last year contained no notion of any deliberate intent to falsify accounts- or what emerged for the first time last week in PwC’s audit statement.

We reported last month that five Wasps companies had been late in filing accounts with Companies House, a criminal offence usually punished by finds depending on how late they are filed.

Four of the companies’ accounts for 2016/7 are this week finally available at Companies House, including Wasps Finance Plc’s accounts which were due on December 31.

But the accounts for the other – Arena Coventry Limited, the Ricoh Arena stadium management company – are still not publicly available at Companies House.

We have asked Wasps’ group if they have finally been filed. We have not received a response.

WASPS RESPONSE

Wasps told us last week in a short statement via a recently hired PR company, Tulchan Communications Group, based in London: “This was an isolated incident, entirely at odds with our policy of maintaining the highest standards of governance. The matter has been addressed directly and as we announced in December, a number of measures have been put in place to strengthen the robustness of the Group’s reporting and accounting procedures.”

A statement from Wasps group chairman Derek Richardson accompanying the accounts adds that measures include chief executive Nick Eastwood having “final sign-off on the terms and accounting treatment of any revenue contract with a value in excess of £100,000 per annum.”

As of today, Wasps would not be drawn further, following our questions, on what precisely happened concerning PwC’s report of evidence being falsified and the overriding of management controls.

WASPS BOND SCHEME

The retail bond scheme was set up in 2015 to transfer the Wasps group’s £35million debts into bonds. Anonymous members of the public and organisations bought the bonds.

They are due to receive 6.5 per cent annual interest on the bonds, and get their money back in 2022.

The bonds can also be bought and sold on the London Stock Exchange.

The bond price fell to 87p in the pound in recent days – from 102p – meaning there is a heightened risk that any purchaser of the bonds would not get their money back.

The terms of the bonds contained covenants – pledges to bondholders – which essentially pledged that Wasps Group would stay financial strong enough to meet the interest payments, and ensure bondholders would not be out-of-pocket.

The last resort for bondholders would be the security of the Ricoh Arena company asset, the bond scheme terms pledge.

It is despite Coventry City Council as freehold owner previously maintaining that, in the event of the Ricoh Arena company’s collapse, the lease would transfer back to the council.

WHAT ELSE DO WASPS’ ACCOUNTS TELL US

The bottom line shows that Wasps group consolidated accounts recorded operating losses of £1.4million, down from £6.2million.

The auditors PwC ‘Material Uncertainty Relating to Going Concern’ statement adds: “..the group is dependent on continued financial support from its shareholder (Derek Richardson) to remain within its committed facilities and to meet the retail bond covenants.

“There can be no certainty that this support will continue. This condition indicates the existence of a material uncertainty, which may cast significant doubt about the group and the company’s ability to continue as a going concern.”

The accounts also reiterate the bonds are secured against the Ricoh Arena, which a recent valuation estimated to be worth £60million, £12million more than previously, a valuation which the accounts call into question.

It is despite cracks recently been discovered in the stadium’s structure, attributed to “ground settlement”. Further covenants relate to the Ricoh’s value.

We have reported former London Wasps’ ongoing annual losses since moving to the city from Wycombe after purchasing the Ricoh Arena company on a huge 250-year lease from Coventry City Council and the Alan Edward Higgs Trust in 2014.

The latest accounts show the pattern continues of rising revenue, but high costs eating into revenue to produce negative bottom-line figures.

Three directors were remunerated £800,000 between them in 2016/7, the highest paid director earned £370,000.

The auditors received £200,000, up from £34,000.

Ultimate shareholder Derek Richardson put in an additional £3.8million during the year 2016/7. His additional £1.1million contribution was subsequently removed from the year’s accounts.

One significant mistake in the previous year’s accounts, outlined in the new accounts, was assuming the group could use Wasps Holdings’ tax losses against Arena Coventry Limited’s (ACL’s) taxable profits, which was incorrect. It reduced this deferred tax asset by £4.1million.

OUR QUESTIONS TO COVENTRY CITY COUNCIL

The council, the freehold owners of the Ricoh Arena, has also so far failed to respond to our questions.

We asked the council – senior officers or council leaders – to comment in relation to the auditor PwC’s revelations concerning falsified evidence, and its concerns over whether Wasps can continue as a “going concern”.

We asked if the council – a champion of Wasps and the Ricoh project – would now be distancing itself from Wasps in any way in light of the revelations.

We asked Coventry City Council if it was indemnified against the risk of Wasps’ collapse.

We have also asked the council questions last week about the Ricoh Arena appearing as security to Wasps bondholders, given the council is the freehold owner.

OUR QUESTIONS TO AUDITORS PwC

We also raised questions with PwC. It told us it was still the external independent auditor to the Wasps Group but confirmed it will be resigning.

Wasps group last week informed the Stock Exchange of its intention to employ new external auditors Mazars for the following year’s accounts, “subject to completion of Mazars’ new client procedures”.

PwC said it would not be appropriate to comment further on what precisely took place at Wasps, and what it uncovered.

We understand that PwC could be obliged to reports its resignation, and the reasons for it, to the Financial Reporting Council – as Wasps is listed as a Public Interest Entity (PIE).

That is because its group of companies includes a public company, Wasps Finance plc, which administers the bond scheme, as opposed to Wasps Holdings Limited, which manages the rugby club.

Guidance documents for auditors from the Financial Reporting Council make it clear that overriding of management controls and falsification of evidence constitute potential fraud.

The “International Standard on Auditing (UK) 240 THE AUDITOR’S RESPONSIBILITIES RELATING TO FRAUD IN AN AUDIT OF FINANCIAL STATEMENTS (Revised June 2016)” make clear the auditor’s duty is to report any potential fraud to the company’s management and potentially to outside bodies if it is felt appropriate.

That would particularly be appropriate “where the measures taken by management or those charged with governance, in the auditor’s professional judgement, were not appropriate to deal with the actual or potential risks of fraud identified or would fail to prevent future occurrences of fraud.”

It adds the auditor must also in relation to a resignation: “Determine whether there is a professional or legal requirement to report to the person or persons who made the audit appointment or, in some cases, to regulatory authorities, the auditor’s withdrawal from the engagement and the reasons for the withdrawal.”

Leaving many questions unanswered, the PwC auditor’s report in the accounts of Wasps Finance plc also states: “During the year, WHL (Wasps Holdings Limited) recognised income of £1.1million relating to a risk mitigation contract.

“Management considered that this arrangement was with an independent third party, and that there was commercial substance to the transaction.

“We focussed on this transaction as our initial audit procedures identified that receipts from this arrangement came from Derek Richardson, the company’s ultimate controlling party, and we had questions as to the commercial substance of the transaction.

“Our audit procedures over the transaction sought to obtain evidence that the contract was with an independent third party, that there was commercial substance to the arrangement, and that the transaction occurred during the year ended 30 June 2017.

“In the course of our audit enquiries into the above, we were provided with evidence which our testing revealed to have been falsified. We undertook additional audit procedures to establish the facts behind the transaction and to determine whether other key audit evidence was reliable.

“Our extended testing did not identify any other issues with the evidence supporting the financial statements of WHL.

“As a consequence of this work, the substance of the contract was ultimately confirmed as a capital contribution from Derek Richardson which was received by WHL post year end.”

 

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