Britain’s accountancy watchdog, the Financial Reporting Council (FRC), has launched an investigation into BDO, a major auditing firm, concerning its audit of Home Reit. This property fund, which focuses on providing accommodation for the homeless, is currently in the process of winding down operations following serious allegations from a short-seller claiming it misled investors.

The FRC announced on Tuesday that it is scrutinizing BDO’s audit of Home Reit’s financial statements for the fiscal year ending August 2021. This time frame is particularly significant as it precedes a critical report by Viceroy Research, which raised alarms in late 2022 about the company’s property valuations and rental income.

In response to the investigation, BDO stated, “We are fully co-operating with the FRC on this matter but are unable to comment further while its investigation is live.” Home Reit, on the other hand, has chosen not to provide any comments regarding the ongoing situation.

Home Reit was established and listed on the London Stock Exchange in 2020, capitalizing on a wave of investor interest driven by environmental, social, and governance (ESG) concerns. The company positioned itself as a solution to the homelessness crisis in the UK, while also promising to deliver stable, inflation-protected returns for its shareholders.

Initially, Home Reit was quite successful, raising over £610 million in addition to £240 million from its initial public offering (IPO). However, the company soon found itself embroiled in turmoil following a series of allegations from Viceroy Research in 2022. In a comprehensive rebuttal, Home Reit denied these allegations but soon appointed Alvarez & Marsal to delve deeper into the issues raised by Viceroy. This led to the emergence of significant concerns that the board claimed it had previously been unaware of.

In the wake of mounting pressures, Home Reit disclosed last year that it was struggling to secure refinancing options for its existing debts on terms favorable enough to recommend to its shareholders. Consequently, the board decided that a “managed wind-down strategy” would serve the best interests of its investors.

In January, when the company finally published its long-overdue annual results for 2023, it revealed a drastic revaluation of its property portfolio. The new valuation stood at a mere 40.7 percent of the original £1 billion purchase price, raising further alarm bells. Compounding matters, the Financial Conduct Authority has also initiated its own investigation into the company.

Notably, Home Reit is structured without any employees, relying solely on non-executive directors. In 2023, the company underwent a major overhaul of its board and replaced its investment advisers, AHRA, along with its alternative investment fund manager, Alvarium FM, appointing AEW Investment Management in their stead.

In its recent updates, the company cited delays in releasing its 2023 results due to the “time and effort” required to address issues that surfaced in the prior year’s earnings. BDO conducted an “enhanced” audit for the 2022 financial year, raising several “limitations of scope” where they felt unable to obtain sufficient information.

Chairman Michael O’Donnell articulated the daunting challenges faced by the company throughout the year, including ongoing investigations into allegations of misconduct, significant tenant arrears, tenant liquidations, and the suspension of shares. He also mentioned the potential for a group action against Home Reit.

Among the troubling statistics, more than 88 percent of Home Reit’s properties, leased to 29 charities, were valued on a “vacant possession basis,” while 8 percent were classified as “uninhabitable.” As of August 2023, three of the charities were in administration, and 28 were deemed to have “weak covenant strength.”

Despite signing off on the annual reports for 2022 and 2023, BDO highlighted various areas where they faced “limitations of scope.” Furthermore, in a trading update released in February, Home Reit disclosed that it had received a pre-action letter of claim from the law firm Harcus Parker, representing a cohort of current and former shareholders. This was a notable escalation, especially since the company’s shares had been suspended in early 2023 after plummeting nearly 70 percent the previous year.