Open Editor's Digest for free
Rula Khalaf, editor of the Financial Times, picks her favorite stories in this weekly newsletter.
H2O Asset Management's auditor has warned that the company's accounts “do not give a true and fair view” of its financial position, giving the once high-flying investment group a rare “negative” opinion.
A former star of European asset management that oversaw more than €30 billion at its peak, H2O was hit by a crisis in 2019 after the Financial Times revealed it had pumped its investors' money into hard-to-sell bonds linked to controversial financier Lars Windhorst. .
Since then, the company has been hit with a record fine by French regulators, suffered the loss of some of its biggest customers and backers, and faces a lawsuit from investors seeking damages of more than 700 million euros.
H2O's Luxembourg Holding Company in January filed its 2022 accounts showing that Mazars had issued a “negative opinion”, stating that the financial statements had not been prepared and presented “in accordance with Luxembourg legal and regulatory requirements”.
Mazars pointed primarily to the fact that the group had not consolidated the accounts of the parent company and its subsidiaries “according to the same accounting periods.”
Mazars also noted that it was “unable to obtain sufficient appropriate audit evidence” about £80 million of illiquid securities held on H2O’s balance sheet, while stating that the uncertainty of the litigation meant it was unable to rule Whether this might jeopardize H2O's ability to continue to operate remains to be seen.
The auditor said: “In our opinion, given the significance of the matter described in the ‘Basis for our negative opinion’ section, the accompanying consolidated financial statements do not give a true and fair view of the consolidated financial position of the Group.”
Negative audit opinions are rarely provided to large companies or financial companies and indicate that the accounts have problems that are so material and widespread that they cannot be relied upon. Consolidated financial statements are supposed to present the finances of the parent company and its subsidiaries as a single group.
H2O's Luxembourg Holding was previously exempt from consolidating its accounts, but has had to set them up on this basis for the first time after French bank Natixis sold its majority stake in the company at the start of 2022.
The asset management company was restructured in 2022, with London-based H2O AM LLP – which is regulated by the Financial Conduct Authority – selling its key subsidiaries to its parent company in Luxembourg.
Mazars signed off on its 2022 H2O audit in December. The financial statements were then originally published in the Luxembourg Trade and Corporate Register in January with two pages of the audit opinion missing.
After the Financial Times asked H2O and Mazars about the discrepancy, a corrected version of the accounts containing the full audit letter was published on the Companies Register in the last week of February.
H2O and Mazars declined to comment.
Recommended
Luxembourg holding company H2O also submitted a separate set of 2022 accounts that had not been prepared on a consolidated basis, and which Mazars deemed impossible to attest due to a lack of “appropriate audit evidence”.
While some H2O funds have previously received warnings from KPMG over their investments in illiquid assets, this is the first time the investment firm itself has received a negative opinion from its auditor. H2O's Luxembourg holding company has previously received unqualified audits from Mazars.
UK H2O entities have previously received “qualified” audit opinions, however, this is a less serious warning that occurs when there is a material accounting issue that is not considered pervasive.
The Financial Conduct Authority (FCA) has also investigated H2O's behaviour, but unlike the French Financial Markets Authority has yet to issue any fine or penalty.
