Equitable case flawed from start to finish

Fielding questions from journalists after the settlement that ended Ernst & Young’s legal battle with Equitable Life, its chairman Vanni Treves made a strange point. He said Equitable had dropped the case on a point that was, ‘to a large extent, technical: what lawyers call causation’.

He meant that the directors had said they would not have done anything to turn the society round, whatever its former auditors had said, thus rendering the chain of events needed to prove negligence incomplete.

That Treves thought this a ‘technical’ point was spinning the issue somewhat. Causation was crucial to the case. It was an attempt to disguise the fact that Equitable’s case was shot through with more holes than the mutual’s management would admit.

Equitable’s pursuit of E&Y in the High Court was frequently unconvincing, and moments from the trial emphasized the society’s lack of grip on the action.

Early on, in a moment that attracted little attention, the court discovered that E&Y had been told its auditing had been fine; it had been absolved of guilt according to a meeting it had with Treves and chief executive Charles Thomson when they terminated the audit contract in 2001.

When quizzed as to whether or not they had absolved E&Y of guilt after the settlement, Thomson sheepishly said they may have done, but that they hadn’t been there for long and did not know what they would discover later.

The admission was fairly shocking. Had Treves and Thomson given assurances in the accounts and defended it later by saying they hadn’t been there for long, they would themselves surely face disciplinary proceedings and even a negligence claim.

It was not just the ‘technical’ point of causation either that was unconvincing. Equitable argued that E&Y was liable for not having highlighted problems with guaranteed annuity rate provisions. Equitable never successfully countered E&Y’s argument that this was not a clear-cut accounting issue at the time.

Apart from anything else, Treves and Thompson had signed off those provisions in 2001, underlining the difficulty, as had Pricewaterhouse-Coopers, Equitable’s new auditors.

Despite all the bluster about E&Y’s own expert witness, KPMG, saying its work had not been up to scratch, Equitable’s case on audit failure remained unproven. The damages claims also invited questions that Equitable never properly answered. The lost sale claim was dropped in July on the basis that directors said they would not have sold the society. The directors had also said they would not have cut bonuses, so why did Equitable pursue any of the lines of argument after that point?

Equitable’s phantom £100m claim invited searching questions of PwC, as well as Equitable. Introduced at the end of June, it was dropped after less than a week of being unveiled, due to the complication of calculating it.

It concerned the possibility of increasing surrender penalties, the sums life companies charge to policyholders who leave early. Equitable claimed that, in conversation with its expert witnesses, it had only just become aware that it could have brought this claim. This begs the question why the company didn’t pursue this from the outset? How could it take a life company, and its raft of expert witnesses, so long to figure this out?

Looking at the details of the settlement, it’s hard to resist the view that Equitable got off lightly in not picking up E&Y’s costs as well.

E&Y chairman Nick Land, speaking to Accountancy Age after the settlement, said that ‘a small part of us is disappointed we didn’t take it through to the end and ultimately crush them’.

The firm could surely have done so, but there was no guarantee the case would not continue through the higher courts, inviting greater risk. E&Y will now walk away now with a mere £5m bill, the rest being paid by its insurers.

Land disclosed that Equitable had made several offers of settlement. At the beginning of the year it was talking about ‘somewhere north of £150m’, then about £80m, then £38m, then £12m, and finally about walking away with just costs. It was only when it made some offer of payment to E&Y, in respect of the strike-out proceedings, that it accepted.

That Equitable was willing to walk away with such small sums will concern policyholders, especially as they were being told at the time that only a ‘substantial’ and ‘serious’ settlement would be good enough.

There are many issues raised by the case, some obvious, some less so. PwC’s role is already attracting criticism. The Big Four firm both audited Equitable and offered up expert witnesses to criticize E&Y: ‘PwC has got themselves into an impossible position,’ said Land.

E&Y would never try and carry out two such tasks, Land claimed. Can it be appropriate for Big Four firms to put themselves up to criticise their immediate rivals in such contexts? Can it even be avoided?

E&Y will have to answer questions on its audit before the Joint Disciplinary Scheme tribunal later this year.

For Equitable, the question of whether Treves and Thomson can hold on to their jobs will be uppermost.

The collapse of the case, ultimately, will be good news for accountants and for the system as a whole, after a summer in which two Big Four firms faced meltdown.

For the good of accountancy, in general, and for the avoidance of the conflicts of interest that the case at times highlighted, that will be something to celebrate.

Alex Hawkes has been reporting from the High Court for Accountancy Age since the case began in April