Mario Christodoulou, Accountancy Age, Friday 4 June 2010 at 13:30:00

Failure to disclose court case led to ?defective decision making?

Ernst & Young failed to seek independent advice about a crucial courtcase which ultimately led to the collapse of their client Equitable Life, areport into the matter has revealed.

The report by the Joint Disciplinary Scheme (JDS) details how E&Y auditorKevin McNamara failed to gain independent legal advice when assessing thepotential impact of a significant legal action against his client, Equitable.

The failure of Equitable inform shareholders about the case would have led to?defective decision making? according to the JDS

E&Y successfully challenged the tribunal?s assertion its audit lackedobjectivity and independence. The auditor however did not contest some criticalelements of the report including its failure to seek independent advice.

The report claimed that instead of seeking his own advice, McNamara reliedupon ?limited reports of that advice? from Equitable according to the report..

Equitable?s loss of the Hyman case proved top be the death knell for thetroubled insurer. The case challenged Equitable?s ability to reduce bonuspayments on its guaranteed pension policies, and forced Equitable to honour itsconsiderable financial obligations to customers.

Almost £5bn was invested in Equitable Life during 1999 and 1998, when thereport claims the court case, and the potential impact, should have been madepublic.

?To have reached the conclusion that the House of Lords? outcome was remote,competent auditors would have had to have considered sufficient appropriatelegal advice but instead E&Y saw and heard only Equitable?s limited reportsof that advice and a part of a note of a consultation with leading counsel,? thereport states.

?Mr McNamara frankly acknowledged that there were omissions on the part of E&Y and of himself in relation to the obtaining of legal advice.?

Equitable?s auditor, Ernst & Young was fined £4.2m, reduced on appeal to£500,000. the body must also pay £2.4 million in costs.

An E&Y spokeswoman said in a statement said the eventual outcome of theHyman case thought to be ?very unlikely? and, under accounting rules, Equitabledid not have to disclose the potential impact in its statement.

Further reading:

E&Y pays out almost £3m following Equitable verdict