Supreme Court rules Grant Thornton must pay £13.4m over negligent advice
A long-running court battle between Grant Thornton and Manchester Building Society has ended with the challenger firm liable for significant damages after senior judges clarified what counts as “negligent” advice.
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And I wonder why the big firms don't separate their general accountancy/tax work from their audit work. With the multitude audit failures in recent years, the reputational damage must be huge.
Actually, they have to do so now. Auditors of Public Interest Entities (PIEs) are not permitted to provide most other services to the same client. The definition of a PIE includes listed companies, insurers and credit institutions.
So today, GT would not have been permitted to provide advice on the accounting treatment of hedge transactions. That said, they would still have to form an opinion on the acceptability MBS accounting treatment.
You know, it's almost as if the accounting practices in the mortgage industry were too complex, and the big audit firms were too complicit in disguising the problems.
I'm starting to think these sorts of practices might have had something to do with the global financial collapse in 2008...
You know, it's almost as if the accounting practices in the mortgage industry were too complex, and the big audit firms were too complicit in disguising the problems.
I'm starting to think these sorts of practices might have had something to do with the global financial collapse in 2008...
You'll be telling me next that the entire fiat monetary system is nothing but a giant Ponzi scheme fraud. Oh, hang on...
Actually, I'd have thought it would make the audit report pretty damned straightforward "given the complexity of derivative FIs, we have NFI what's going on and are therefore incapable of expressing an opinion".
Audit fee £100....
Firstly Shame on me for not know who the Manchester Building society are.
Secondly, what the hell is a Building society getting involved in the following ;-
Hedge accounting is used to reduce the volatility of the mark-to-market value of swaps in accounts, and from 2006, Grant Thornton advised the society that its accounts could be prepared using the method to give a true and fair view of its financial position.
This allowed the society, under tightly specified circumstances, to adjust the carrying value of the lifetime mortgages to offset any changes in the value of the swaps.
Thirdly, what the hell is a building Society getting involved in taking advice from Grant Thornton, they should be experienced enough by now.
If any of the rest of us (i.e. the little guys) were to have done this . . . . . . . . . .
I reckon GT's PII premiums must be pretty high these days (and this decision is bound to increase them for all generally, all else being equal). I'm sure the legal costs of this defeat for GT (or rather their insurer) alone would be well over £1m.
Commiseration for GT. Very good firm and I use them for adhoc consultancy works. As an auditor, it is good to see a case going all the way to the Judge rather settled out of court. This way at least we may learn more about the concept of negligence and events leading to payouts.
“Going forward, we can expect an uptick ..."
Anyone impressed by the language? Why do people talk like this?
Still don't get it. Why would GT's advice on how to account for something impact the Society's decision to enter into the swaps? If the market value fell then how is that GT's fault ? No-one seems to be saying GT provided advice on entering into the swaps, just whether were eligible for hedge accounting (when they were not). Who advised on buying the swaps? The bank manager selling them maybe?
I think in part it is that the accounting may have disguised the exposure position leading to the society not making decisions earlier re their "real" position and suffering loss as a result.
It is in some degree similar to RBOS and Ambro, where the bankers in RBOS did not appear to have really understood what it was they were buying when purchasing Ambro.
Bank balance sheets frankly remind of the Schleswig Holstein Question (except unlike Palmerston I never understood), they are so opaque they are now a sector, together with insurers, where I will just not buy shares as I just do not understand their accounts and I am frankly not sure how many people , including analysts and auditors, really do understand what they are shown.
Thank you for raising this as it occurred to me when reading the article to begin with.
You would expect the building society to have created models outlining the cash flows of the swaps and the risks involved when interest rates rise or fall which would not change depending on the year end position.
Year end accounting is merely to show the position at the balance sheet date according to relevant accounting standards. However the regulations of a building society require levels of capital to be maintained based on year end accounts. It is not completely clear to me but if the capital was overstated using an incorrect method, the resulting loss when corrected may be what forced the society to break the swaps, thereby realising the loss.
By analogy I can remember when pension liabilities were put on the company balance sheet. It created havoc at the time, which still affect commercial decisions, even though the underlying cash flows have not changed at all.