The fees charged by Britain’s big accounting firms for winding up failed companies will come under scrutiny after the Office of Fair Trading (OFT) yesterday launched a wide-ranging inquiry into corporate insolvencies.

The competition watchdog has launched the investigation amid concerns within the Government and industry that the cost of going bust in Britain is higher than in other countries. Critics of the insolvency regime claim that it is dominated by big accounting firms, which rack up huge fees even though creditors may end up receiving only a fraction of what they are owed.

Ernst & Young this year picked up more than £3 million for its work on the collapse of Zavvi, the music retailer, while Deloitte made more than £2 million from the bankruptcy of Land of Leather, the furniture store chain. PricewaterhouseCoopers (PwC) has received more than £150 million in fees for its role as the administrator of Lehman Brothers’ European arm.

The investigation by the OFT will examine the handling of bankruptcy situations including administrations, liquidations and so-called pre-pack administrations, whereby companies enter bankruptcy for only a matter of hours before their assets are repurchased. The investigation will not cover personal insolvencies.

Clive Maxwell, a senior director at the OFT, said: “We want to identify any potential problems within the corporate insolvency market to ensure that firms and practitioners are competing freely and that the market is working well for the end consumers.”

The OFT aims to complete its inquiry by the end of next year.

Prem Sikka, a professor of accounting at the University of Essex, said that an investigation was overdue as many companies, particularly small ones, were placed into liquidation unnecessarily and the sector was poorly regulated. “Insolvencies can run for decades and no one seems to inquire into the delay in completing them,” he said.

The rise in insolvencies and other corporate recovery work has been a boost for big accounting firms this year as revenues in other practices, such as tax and auditing, slumped because of the downturn.

In October, BDO, which is Britain’s sixth-biggest accountant, said that fees generated by its business recovery unit jumped almost 50 per cent in the past year to £57 million.

Steven Law, vice-president of R3, the Association of Business Recovery Professionals, defended the insolvency regime and said that the OFT’s study was based on flawed assumptions.

According to R3’s research, both the amount of money ultimately returned to creditors — about 85 per cent — and the amount of time that it took to wind up a company — about a year — compared favourably with similar countries. “We are proud of what we do in terms of rescuing businesses and saving jobs,” Mr Law said.

The number of companies that were forced to wind down after filing for bankruptcy fell 3 per cent to 3,101 between July and September, according to the Ministry of Justice.

There are about 1,700 insolvency practitioners in Britain, more than half of whom work at accounting firms. The rest are employed by specialist insolvency groups or law firms. Their average salary is £110,000, yet star insolvency partners at big accounting and law firms can earn upwards of £1 million a year.

Commentary, page 59

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