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Ernst & Young fined £500,000

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4th Jun 2010
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Ernst & Young has been fined half a million pounds and ordered to pay £2.4m in costs by the Accountant's Joint Disciplinary Scheme (JDS) and Appeal Tribunal following an investigation into its audit of Equitable Life.

Both former Ernst & Young partner Kevin Paul McNamara and the firm were reprimanded by the Appeal Tribunal.

The decision is the result of a six-year investigation into the auditors' possible negligence in the near-bankruptcy of the life insurance company Equitable Life, which was only saved by a cut in the pensions and retirement savings of its policyholders in 2000.

Ernst & Young was accused of failing to qualify accounts between 1997 and 1999, which did not include adequate provisions to cover outstanding Guaranteed Annuity Rate (GAR) policies. The investigation also found that the auditor had failed to take note of the uncertainties surrounding the House of Lords hearing which decided in 2000 that Equitable's decision to reduce GAR payments was illegal.

JDS and the Appeal Tribunal found that the firm did not give warning to policyholders of the possible consequences of losing the case and the 1999 financial statements did not show "a true and fair view because of the inadequate provision made".

A spokesman for Ernst & Young said: "All complaints against us for 8 of the 11 audit years, from 1990–2000, were struck out by the Joint Disciplinary Tribunal (JDT). We are nonetheless disappointed by the remaining adverse findings of the JDT in relation to aspects of the audit for the financial years 1997-1999.

"The Joint Disciplinary Scheme (JDS) investigation is completely separate from the high profile civil litigation that Equitable mounted, and subsequently lost, against Ernst & Young in 2005.

We extend our sympathies to the policyholders of Equitable Life, who have been impacted by the near-collapse of the society, following events which lay well outside of our control and the remit of our role as auditor. We welcome the actions of the new government in seeking to compensate the policyholders".

The auditor also issued the following clarifications:

  1. "This is the only time that Ernst & Young has been subject to disciplinary proceedings by our regulators.                          
  2. The JDT had already found that "it has not been proved that any particular person or group of persons or body has suffered financial loss as a result of any of the proved complaints". This view is consistent with the failure of legal claims by the Society against Ernst & Young in 2005. Nothing in our audits caused the Society or the policyholders any loss or damage.
  3. The principal reason for the decline in Equitable's fortunes was the wholly unexpected decision of the House of Lords in the Hyman litigation in 2000.
  4. In terms of the remaining adverse findings of the JDT: these were matters of complex professional judgment in a difficult and novel area in which there was no direct technical or professional guidance at the time. It is therefore frustrating that the JDT did not agree that our judgements were reasonable, particularly given that the level of provision in the Society's accounts for 1999 has since been supported by others, including PwC, the new auditors of Equitable, and by KPMG our expert witness in the tribunal process.
  5. The Appeal Tribunal highlighted that given the circumstances at the time it would have been difficult for Ernst & Young and Equitable to have viewed the eventual outcome of the Hyman litigation as anything other than "very unlikely". Under the accounting rules applicable in the late 1990s, as is the case with today's rules, there is no requirement to disclose remote contingencies.
  6. We are confident that there is no basis for any further litigation in relation to Equitable, both on substantive grounds and because any further claims are time barred.
  7. Any lessons from our audit of Equitable have long been learned and embedded in our audit systems and procedures. The relevant individuals at Ernst & Young have retired from the firm in the last 10 years.  
  8. No auditor in the late 1990s could draw on the kind of support that today's financial services regulatory regime provides to the profession. The Parliamentary Ombudsman's report in 2003 highlighted the shortcomings of the regulatory regime at that time.
  9. We welcome the fact that the Appeal Tribunal has significantly reduced our fine by over 90% to £500,000 and has recognised the appropriateness of our appeal by not awarding costs against us.
  10. We regard these matters – a decade on – as now closed".
     

Equitable Life: The story so far

 
 

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Replies (4)

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7om
By Tom 7000
04th Jun 2010 12:09

E and Y fine

They have to be happy with the fine, though the costs are the hard thing to bear

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By Graeme Lindsay Abdn
04th Jun 2010 13:38

E&Y Fine

They will be ok, they will have provided for the fine and costs.  Wouldn't they?

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By User deleted
04th Jun 2010 17:33

Fine only chicken feed

in relation to the losses suffered by Equitable policyholders

Simple remedy - why not forget the fine and make them liable to compensate the policyholders?

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John Stokdyk, AccountingWEB head of insight
By John Stokdyk
07th Jun 2010 10:47

PR aftermath

The JDS’s Equitable Life decision and report have been the subject of considerable spin during the past few days. On Friday, the firm’s statement (quoted above) welcomed the judgment of the scheme’s Appeal Tribunal “overturning all findings relating to objectivity and independence for our work on the audits of the Equitable Life Assurance Society”.

The story behind this is that E&Y appealed against a much more severe judgment from the JDS in late 2008. While the appeal was being heard, the firm obtained a “super injunction” preventing news of the appeal or the contents of the original JDS report from being reported, or even disclosed to other regulators.

The Guardian reported that the initial JDS investigation found E&Y and McNamara guilty of more than 20 instances of a “lack of professional competence” in the audit of Equitable's accounts for 1997, 1998 and 1999 as well as determining there had been "a lack of objectivity and independence". The initial penalties were set at a fine of £4.2m with £5.75m costs.

Following the appeal, E&Y pointed out having overturned the findings of a lack of lacked objectivity and independence and complaints on all but three of the years under review contributed to a significantly reduced fine.But the firm’s stance did not cut much ice with Observer/Guardian City editor Ruth Sutherland who commented, “Nowhere in the statement is there an apology for the failings the disciplinary body did hold E&Y responsible for. Far from expressing contrition, the company said it was disappointed that some adverse findings about its reports between 1997 and 1999 were upheld.”

She also pointed out that while E&Y “got off lightly over Equitable”, it remains in deep trouble for its audit of Lehman Brothers. “The audit profession has so far escaped sustained scrutiny in the aftermath of the credit crunch. It's about time that changed,” she wrote.

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