Attached hereto is a Background Note containing further information; in order to access the three Reports of the Joint Disciplinary Tribunal, please click onto "Tribunal Report".

Christopher Dickson - + 44 (0)20 7247 1511

Whilst Nunn Hayward initially contested all the Complaints, the firm subsequently admitted most of them. The Tribunal heard and ruled on the contested Complaints.

In respect of Nunn Hayward, there is a Tribunal Report and Complaints (annotated to show two amendments made, and the finding on each Complaint). In respect of Mr Dales and Mrs Dodd, there is in each case a Tribunal Report, an Agreed Statement of Facts and Complaints.

Publication of the Reports has been held back until the end of the trial which has just finished at Southwark Crown Court.

An important feature of the Nunn Hayward case is the finding by the Tribunal that a firm of chartered accountants is liable in its own right to an adverse disciplinary finding for the lack of integrity of one of its partners.

There follow some questions and answers which you may find of assistance.

Versailles was incorporated in 1990. Throughout the period the two executive directors were Mr Carl Cushnie, the Chairman and Chief Executive, and Mr Frederick Clough, the Finance Director. Versailles was listed on AIM in September 1995 and transferred to the main LSE in October 1997.

Versailles provided trade finance primarily to businesses with a poor credit history. The rates of interest charged were high: approximately 21% pa with an additional administration fee of 2.5% - 3.5% of the invoice value.

The corporate structure was unusual. One part of the business was funded by bank borrowings and, after floatation, by shareholders. The other part, which was managed by Versailles, was funded by Versailles Traders Limited ("Traders"), a UK company until 1995, but thereafter, a company incorporated in the British Virgin Islands. Traders consisted of a number of wealthy investors ("the traders"), and its business was mingled with that of the first part of Versailles.

Versailles provided two main types of trade finance: Accelerated Payment and Material Purchase. Whilst the legal form of each of these methods was that Versailles bought and sold goods and raw materials, the substance of the transactions was that Versailles financed its clients’ purchases of raw materials and subsequent sales of goods.

Versailles appeared to grow at a furious rate: turnover was reported to have increased from £46.6 million in 1995 to £232.4 million in 1999. Operating profit apparently rose from £2.8 million to £15.3 million over the same period. The share price jumped from 7.5p on flotation in 1995 to £2.50 in September 1999, by which stage Versailles was a FTSE 250 stock.

In December 1999, dealings in Versailles shares were suspended; and in early 2000, the company was placed in administrative receivership. At its collapse, Versailles owed more than £70 million to its lenders.

It is now clear that many of the transactions were fictitious, documents were forged, money was circulated to give the appearance of activity, there was "cross-firing" of cheques, and computer controls were overridden.

Nunn Hayward were the auditors, Mr Dales was the partner in charge of the audit, and for most of the period, Mrs Dodd was the audit Manager.

The JDS investigation concentrated on the last two years’ audits, 1998 and 1999, but also looked at what had happened earlier.

There were several warnings that all was not well at Versailles, which were ignored:

• In 1996, Mr Clough arranged for publication of the Versailles accounts, and their circulation to shareholders, before the audit was completed. The published accounts contained a false audit certificate. When this was discovered, Nunn Hayward signed an audit certificate on unchanged accounts after little further work, and these were re-circulated to shareholders. In the face of this obvious dishonesty, Nunn Hayward acquiesced in a circular to shareholders describing what had happened as "an oversight". The reality was that Versailles was too important a client for Nunn Hayward to risk losing: when resignation as auditors was mentioned by Nunn Hayward’s solicitors, Mr Dales responded that this was "a big fee account" and his firm did not want to resign. Astonishingly, and despite what had happened in 1996, Nunn Hayward and Mr Dales never completed the audit in the following year, 1997, a very serious matter in itself.
• Mrs Jill Long, an extremely able Manager who worked for Nunn Hayward for a short period on the 1998 Versailles audit, immediately picked up a significant number of matters of concern. These included a lack of access to Versailles’s accounting records; Versailles’s reluctance to produce fundamental accounting information; its complex accounting system and the amount of control which Mr Cushnie was able to exert over it; and the lack of information about Traders in the British Virgin Islands. She wrote two memoranda, the first to Mr Ian Nunn, the senior partner, and Mr Dales, and the second to all the Nunn Hayward partners, detailing her concerns. These were ignored, and she was shortly moved off the audit.
• Mr Douglas Brown, the Nunn Hayward tax partner, assisted Mr Cushnie and Mr Clough in an investigation by the Inland Revenue Special Compliance Office. He minuted Mr Dales that Mr Clough was impossible to obtain information from, Mr Cushnie had "lost interest", and he (Mr Brown) wondered whether he was simply being used as a delaying mechanism to enable Mr Cushnie and Mr Clough to gain time. He remarked that Mr Clough "could not tell me what income he had had."

The most serious Complaints against Nunn Hayward and Mr Dales were that they signed false "comfort letters" required by the banks which had lent money to Versailles. These letters certified that certain tests had been carried out by Nunn Hayward and Mr Dales to verify the amount of Versailles’s debtors, when in truth no such tests had been carried out. It is these Complaints which display a lack of integrity. The gravity of what Nunn Hayward and Mr Dales did lies in the fact that the banks relied on the information in the letters to assess the safety of their loans and thus to continue lending to Versailles. Without bank lending, Versailles could not have survived as long as it did. There is evidence that several comfort letters were simply faxed to Nunn Hayward by Versailles’s accountant with the request: "...please type the enclosed letters on your letter head...and fax them across to Fred [Clough] a.s.a.p. and post hard copy to him direct."

The 1998 and 1999 audits were not conducted with the professional skill care and diligence and proper regard for technical and professional standards expected of chartered accountants and a firm of chartered accountants. In particular:

• Nunn Hayward, Mr Dales and Mrs Dodd treated the business as one of buying and selling goods rather than providing trade finance.
• Despite the warnings set out above, no or grossly insufficient regard was had to the possibility of fraud.
• In two cases, Versailles was asked to select the audit samples itself.
• Nunn Hayward, Mr Dales and Mrs Dodd relied on photocopies rather than insisting on seeing original documents – this enabled bank statements, for example, to be altered before being produced to the audit team.

The Tribunal described Nunn Hayward’s work for the 1998 and 1999 audits as "lamentably poor."

Mr Clough has pleaded guilty at Southwark Crown Court to a number of offences of fraud. Mr Cushnie has today been convicted of defrauding the traders.

No. Mr Clough was originally a Member of the ICAEW, but was excluded from membership some time before he became Finance Director of Versailles.

Nunn Hayward was severely reprimanded, fined £50,000 and ordered to pay costs of £75,000.

Mr Dales was excluded from membership of the ICAEW and ordered to pay costs of £10,000.

In the case of Mrs Dodd, the Tribunal made no order by way of penalty.

Both Versailles Group plc and the main trading subsidiary, Versailles Trade Finance Ltd, were placed in Administrative Receivership in early 2000. The receivership continues. It is likely that shareholders have lost the whole of their investment.

The rôle of the JDS is to promote the highest possible standards of professional and business conduct, efficiency and competence by chartered accountants.

The JDS conducts independent investigations into the work and conduct of chartered accountants where this has given rise to public concern. The sponsors of the Scheme are the ICAEW and the Institute of Chartered Accountants of Scotland.

Cases are investigated by the Executive Counsel, Christopher Dickson, a barrister employed by the Scheme. Where he finds that work or conduct appears to have fallen below acceptable standards, he lays complaints before a Joint Disciplinary Tribunal headed by a QC or a retired judge. It is for the Tribunal to decide, on the basis of the evidence presented, whether the complaints have been substantiated; and if so, what penalty should be imposed. Appointments to Tribunals are made by the Executive Committee, the governing body of the JDS, acting independently of the Executive Counsel.

Mr Adrian Brunner QC, the Chairman, is a Member of the Bar of England and Wales in independent practice. Mr Ian McNeil JP FCA is a former President of the ICAEW, a former Deputy Chairman of the Financial Reporting Council ("FRC"), a former member of the Takeover Panel and a former partner in Moores Rowland. Mr Philip Haynes FCA is a former partner in HLB Kidsons, having served on the firm’s National Professional Practices Committee.