UK - Equitable Life is suing its auditor Ernst & Young (E&Y) for up to £2.6bn for its signing off on its accounts, claiming its accounts should have reflected the guaranteed annuity rate (GAR) liabilities that took the firm to edge of collapse.
Equitable’s lawsuit - filed in the High Court by Equitable’s lawyers Herbert Smith - claims that the auditor should have included technical provisions for the firm’s GAR liabilities in its accounts between 1997 and 1999. By failing to do so, the firm claims that E&Y failed in its duty to ensure that the accounts were “a true and fair” reflection of its finances.
According to Equitable’s lawsuit, E&Y cost the firm billions from a possible sale. Equitable’s management claim that had the firm been advised about the true depth of its liabilities, it would have sold the business - which at the time “still had a substantial value to third parties” - for £2.9bn.
The complaint also states that E&Y also failed the Equitable by not reporting the true extent of its liabilities to management. Equitable alleges that E&Y failed it as an auditor by approving of the accounts, signing what it calls “unqualified audit reports”.
The legal action against E&Y is the first taken by the firm against the people it believes had a hand in its misfortune. Herbert Smith has written to regulators, E&Y and former Equitable directors asking them to explain their actions in light of the firm’s woes.
Whilst the firm expects to make an announcement about further legal action soon, it has warned policy holders that “it will be some considerable time before we see any tangible results from the legal proceedings”.
Presently, the firm is gathering responses from former directors and is waiting for the conclusion of the Penrose enquiry before taking any action against the regulatory agencies at the time.
Equitable said that it is waiting for the outcome of the Penrose inquiry as it would “avoid wasting policyholders’ money” on its on investigation, when Lord Penrose already has access to the documents it wants to examine. However, it is warning that this could take some time as the Government has stated that the Penrose report will be delayed until next year.
The only person not on the Equitable’s litigation list is former director Jonathan Dawson. The firm has been advised that it has no case against Dawson.
Equitable’s troubles began when it went to court to determine whether or not it had the right to declare differential terminal bonuses, following complaints from GAR policy holders. Up until the House of Lords verdict, the society insisted that it only had liabilities of £50m - when it lost in the Lords it then admitted it needed £1.5bn to cover its exposure.
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