H2O’s auditor warns accounts ‘do not give a true and fair view’

H2O Asset Management’s auditor has warned that the firm’s accounts “do not give a true and fair view” of its financial position, handing the once high-flying investment group a rare “adverse” opinion.

A former star of European asset management that oversaw more than €30bn at its peak, H2O was engulfed in crisis in 2019 after the Financial Times revealed it had poured its investors’ money into hard-to-sell bonds linked to the controversial financier Lars Windhorst.

The company has since been hit with a record fine from French regulators, suffered the loss of some of its biggest clients and backers, and faces a lawsuit from investors seeking over €700mn in damages.

H2O’s Luxembourg holding company in January filed its 2022 accounts showing that auditor Mazars had issued an “adverse opinion”, noting that the financial statements had not been prepared and presented “in accordance with Luxembourg legal and regulatory requirements”.

Mazars primarily cited 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 flagged that it was “unable to obtain sufficient appropriate audit evidence” around £80mn of illiquid securities held on H2O’s balance sheet, while stating that uncertainty around litigation meant it was unable to judge whether this could jeopardise H2O’s ability to keep operating.

The auditor said: “In our opinion, because of the significance of the matter described in the ‘Basis for our adverse opinion’ section, the accompanying consolidated financial statements do not give a true and fair view of the Group’s consolidated financial position.”

Adverse audit opinions are rarely given to large companies or financial firms and indicate that accounts have such material and pervasive issues that they cannot be relied upon. Consolidated financial statements are supposed to present the finances of a parent and its subsidiaries as a single group.

H2O’s Luxembourg holding company was previously exempt from consolidating its accounts, but had to prepare them on this basis for the first time after French bank Natixis sold its majority stake in the business at the start of 2022. 

The asset management firm restructured in 2022, with London-based H2O AM LLP — which is regulated by the Financial Conduct Authority — selling its key subsidiaries to its Luxembourg parent company.

Mazars signed off on its audit of H2O’s 2022 accounts in December. The financial statements were then originally posted to the Luxembourg Trade and Company Register in January with two pages of the audit opinion missing.

After the FT asked H2O and Mazars about the discrepancy, a corrected version of the accounts containing the full audit letter was posted to the corporate register in the last week of February.

H2O and Mazars declined to comment.

H2O’s Luxembourg holding company also filed a separate set of 2022 accounts that were not prepared on a consolidated basis, which Mazars deemed were impossible to certify due to a lack of “appropriate audit evidence”.

While some of H2O’s funds have previously received warnings from KPMG due to their investments in illiquid assets, this is the first time the investment firm itself has received an adverse opinion from its auditor. H2O’s Luxembourg holding company has previously received unqualified audits from Mazars.

H2O’s UK entities have previously received “qualified” audit opinions, however, a less severe warning that occurs when there is a material accounting issue that is not deemed pervasive.  

The FCA has also been investigating H2O’s conduct, but unlike France’s Autorité des Marchés Financiers, is yet to issue any fine or sanction.