Deloitte is only days away from deciding who gets to buy Australia’s second biggest airline, Virgin.
But the independence of the accounting firm as administrators of one of the biggest corporate insolvencies in Australian history is in question.
Crikey understands that Deloitte is the official auditor of a fund held by one of the two remaining bidders, Cyrus Capital Partners, meaning a sale to the company could potentially benefit Deloitte.
Deloitte declined to comment on the potential conflict of interest and would not say what interests it has disclosed as part of the sale process. A spokesperson for Cyrus also declined to comment.
Too big to disclose?
Given the size of Deloitte, it’s inevitable that conflicts of interest are going to come up during a sale as big as Virgin. But if there is a conflict, why isn’t it being disclosed?
Deloitte was appointed by Virgin to oversee its voluntary administration after the airline collapsed in April, owing $5.3 billion. It is due to reveal the successful bidder on Monday. So far it’s a race between US private equity firms Cyrus and Bain Capital, as well as Virgin bondholders, who threw together a last minute proposal on Wednesday.
Cyrus has been a surprising entry to the bidding, and has shot to the lead with its team of aviation experts and Wall Street elites. There’s also a reported connection to the Virgin brand: Cyrus partner John Rapaport was a director of Virgin America for eight years. Ex Virgin Group North America CEO Jonathan Peachey is also among the Cyrus bidding team.
Conflicts of interest are almost impossible to avoid at the big four accounting firms, given their size. This is why the UK is trying to break them up. A shake up by the UK’s Financial Reporting Council would essentially separate the audit and consulting operations of the firms — KPMG, Deloitte, PwC and EY — and follows a number of conflict of interest scandals.
But in Australia, as noted time and again by Crikey, the lack of transparency of the big four accounting firms, which are among the country’s biggest political donors and collect millions in government contracts, regularly goes unchecked, despite the corporate watchdog finding they are often compromised.
Former competition head Allan Fels has also supported introducing laws to break them up, saying it’s the “only solution” to eliminating conflicts of interest.
Both Cyrus and Bain lodged their offers with administrators earlier this week. Meanwhile, Deloitte is focused on the 11th hour proposal from bondholders, which is hoping to scuttle a sale to the big New York firms in favour of the airline being returned to the ASX.
Whichever bidder is successful will be revealed in coming weeks, when Deloitte informs creditors which deal is best for them — which, as administrators, is ultimately their job.
Reliable auditing is essential for investor confidence and suppliers assessing creditworthiness. It’s a large business in its own right and there’s good reason for it to be done only by standalone auditing businesses – with a mandatory maximum number of consecutive years per client. There’s also the small matter of tax….
Given that none of the BigFor in this country, nor their equivalents O/S, saw anything wrong with the accounts they audited and pronounced zippidy doo dah spiffy preGFC, surely there is some case to be made for dereliction of fiduciary duty?
Excuse my ignorance, but exactly where is the conflict?
Deloitte audits one of Cyrus’ funds. How exactly do they benefit if Cyrus gets Virgin? They will continue as auditors whether that happens or not.