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Fresh claims emerge in Cattles legal action

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26th Feb 2013
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Yorkshire subprime lender Cattles has officially filed papers with the High Court in London against its former auditor PwC over failing to spot danger signs in its accounts.

A spokesperson for the company confirmed the High Court action occurred late last week, shedding new light on the £1.6bn damages claim against PwC.

It also follows two recent disciplinary hearings where former finance directors of the company Peter Miller and James Corr were banned from the ICAEW and ICAS respectively.

The long-running accountancy scandal surfaced in early 2009 after warnings from a whistle-blower, but Cattles has argued that PwC should have raised the alarm at least two years earlier.

Cattles claims PwC was “grossly inadequate” in failing to warn the lender and failing to apply “proper professional scepticism” to its growing loan book.

As reported in the Yorkshire Post, the new claim alleges: “Any reasonably competent auditor would have concluded from proper audit work and reported to the audit committee that the loan loss provision in the accounts for 2006 and 2007 did not give a true and fair view of WFSL’s (Welcome Financial Services) financial position, and that a very substantial increase in the level of loan loss provision was required in each of 2006 and 2007.”

The papers reveal the extent to which Welcome’s loan book was manipulated. The claim suggests Welcome should have admitted loans were impaired after a limit of 120 days in arrears – four missed monthly payments, but instead it used “deferments” to delay when a loan was classed as impaired, or used “rewrites” to revise its terms.

Documents filed with the High Court allege PwC failed to:

  • investigate the nature of Welcome’s whole loan book
  • bring an attitude of “proper professional scepticism”
  • take proper account of the risk of deliberate mis-statement by management
  • ensure proper disclosure in financial statements
  • communicate properly with Cattles’ audit committee
  • consider the appropriateness of a 120-day “deferred contractual arrears impairment trigger”
  • probe the use of “deferments” and “rewrites”

A spokesperson for Cattles added: “After a thorough, independent and objective review of the merits of this claim, it is clear to us that PwC were negligent in their role as auditors. As a consequence, Cattles and its creditors suffered very significant losses. It is therefore in the best interests of the creditors of Cattles that this claim is properly pursued to enable creditors to be appropriately and fairly compensated.”

The claim by Cattles and Welcome is being pursued by restructuring firms Zolfo Cooper and Rollings Oliver.

PwC has said this is an inflated and misguided claim and it would vigorously defend its work.

The case is not expected to start until late 2014.

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