Financial Daily from THE HINDU group of publications
Monday, Sep 26, 2005
Columns - Errors & Omissions Expected
Subjunctive mood to add to surreal stuff
JUST as `dog bites man' is no news, so too, there is no surprise value when you hear about action against auditors for negligence. Haven't we had too many of them already? But the opposite should be of interest, you'd agree; and we aren't talking about auditors suing companies, but about companies dropping action.
Which is what happened in the case of Equitable Life, as one learns from the latest posting on www.accountingweb.co.uk: "In a surprise about-face, Equitable Life has dropped its £2.6 billion negligence case against its former auditors, Ernst & Young (E&Y)."
For starters, Equitable Life Assurance Society was established in 1762 "as the first mutual life assurance company, set up and run for its members and continues to run as the oldest mutual life assurance company in the UK," as www.equitable.co.uk reports. "Although the longest surviving life assurance company, it has in recent years undergone an exceptionally difficult period," concedes the site.
Main among its many troubles was the one about its numbers. E&Y had stated that the Society's accounts, for the years up to December 31, 2000, represented a true and fair view of the financial condition. The new Board that took office in early 2001, pushed by the overwhelming view of policyholders and action groups, "decided to investigate what caused Equitable's near collapse and, in particular, whether it would be possible (and cost effective) to seek redress for policyholders through the Courts," as the Society's letter to policyholders dated September 23 informs.
Based on legal advice that "the Society had credible and cost effective claims against E&Y", the Board "decided to launch the litigation against the former auditors".
At the core of the claim against E&Y was negligence in their audit work, informs the letter. (For the curious, there is the `Report of the Equitable Life Inquiry', led by the Rt Hon Lord Penrose, running to several hundred pages, as you'd see on www.hm-treasury.gov.uk.)
"We launched this hugely technical and complex litigation after careful deliberation, having taken expert audit and actuarial guidance and having received clear legal advice," says Vanni Treves, Chairman of the Society in the latest press release.
"We had a duty to bring the claim against E&Y. Not to have launched this action would have been a dereliction of our responsibilities to continuing policyholders."
"The claim against E&Y depended in large part on the evidence of the former directors as to what they would have done (note: not what they should have done) had the auditors required an extra provision of up to £1.5 billion in the Society's accounts for 1997, 1998 and 1999 because of the guaranteed annuity rate (GAR) issue," informs the letter. And the subjunctive `would' haunts the communication, to add to the surrealism of action against the auditors getting dropped.
Trial began on April 11, 2005 and evidence was heard from the former directors.
It appears that most of these directors gave evidence in support of E&Y, and said that they would not in fact have done anything in response to the £1.5 billion suggestion, had the same been offered by the auditors. This is a jaw-dropping instance of corporate governance, I'd say, but you may respond, "Isn't it good they are `former'?"
Wait, their evidence appears to have done the damage, because the letter speaks of `clear legal advice' that the Board has now received.
"On the basis of that advice, we believe that there is too high a risk that the Judge would conclude, contrary to what our expert witnesses say the old Board should have done, that they would in fact have taken no action, or would have taken action in relation to which the Society cannot claim losses from E&Y."
Means? "In short, the evidence given by the former directors in court (which, frankly, took us aback) has undermined our case against E&Y. After considering the advice we have received following the evidence, we have concluded that, however much we may regret it, settling our claim against E&Y now is the right decision on behalf of policyholders."
Treves would add that the decision was taken `with great sadness and frustration'.
"We are deeply disappointed that we have been unable, through the Courts, to secure redress from E&Y for our policyholders," adds the letter, to rub it in, though it all looks like a hurriedly dropped suit without going the whole hog to secure redress.
"At all times, however, we believe we have acted in the best interests of our continuing policyholders," says the Board with assumed conviction; but policyholders may not think so, especially because "the sleepwalk down the blind alley of litigation", has already squandered £30m of their money, as Teresa Hunter writes on http://scotlandonsunday.scotsman.com.
Hunter writes about `distraught elderly people, whose health has been ruined with the worry of it all, or who have been forced to sell their homes' and annuitants who have already lost `60 per cent of their pensions and are facing the terrifying prospect that the money will run out before they die'.
But, that's no news, is it?
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