City law firm Herbert Smith had spent several months compiling a report for the new directors of Equitable Life Assurance to see whether there was a case to be answered by former auditor E&Y – and then waited several more months while E&Y formulated a reply.
When the reply was submitted, Herbert Smith in turn submitted a writ alleging E&Y’s breaches of duty as auditor. At stake is £2.6bn – the money needed to satisfy investors who had taken out guaranteed annuity rate policies.
E&Y vigorously denies any wrong doing, saying: ‘For the record, we told Herbert Smith that they had not provided us with sufficient information for us to provide a substantive reply.’
If the claim were to succeed, E&Y’s professional indemnity insurance would be wiped out, and the firm could follow, though its limited liability partnership status could give it some protection.
So who has the firm turned to in its hour of need?
Barlow Lyde & Gilbert, a law firm based in the City, has fast cornered the market in defending accountants against professional negligence claims.
The firm cut its teeth on such high profile cases as Guinness, Maxwell and Barings.
Clare Canning, a partner at the firm says: ‘Following a period of relative calm in litigation against the large accountancy firms, we have been increasingly seeing over the last 12 months a steady increase in the number of problems and claims arising in the audit and tax contexts.’
Canning is the partner tasked with fighting E&Y’s case against the Equitable, having previously helped the firm in its fights over earlier cases.
Her most significant win came when she successfully defended PricewaterhouseCoopers against the claim of negligence brought by Sir Elton John last year.
‘Inevitably, given Enron, accountants are now facing a climate of suspicion and distrust which is heightening the debate about auditor independence and may well change the face of the profession’s approach to audit,’ Canning says.
Canning, along with fellow partner Andrew Scott, is described as ‘outstanding’ by those that have had dealings with her. Others cited for their reputation include Peter Burrell, an up and coming star ironically working for Herbert Smith, Equitable’s law firm.
Another City firm, Linklaters, is helping KPMG over the Independent Insurance case.
KPMG was the auditor of Independent when it went into liquidation last summer – PwC was appointed as provisional liquidator, but following an investigation by the Financial Services Authority, the case was referred to the Serious Fraud Office, which is still carrying out its investigation.
A spokesman for the SFO declined to say whether the investigation would cover the role of the auditor, but the accountancy profession’s Joint Disciplinary Scheme is currently reviewing the audit papers, though the investigation is believed to be still in its early stages.
In the past KPMG has also made considerable use of Stephenson Harwood, but the firm declined to talk about the law firms it uses in such cases.
If that wasn’t enough, KPMG is also in the firing line for private actions – Class Law, the class action specialist, is preparing papers to sue the FSA, but it is also considering filing a claim against KPMG.
And to add to the fun, Class Law is also helping former employees of the one-time insurance darling in their fight against PwC, claiming the liquidator failed to follow proper redundancy procedures.
But a spokesperson for PwC says: ‘We have yet to see what basis they have for action.’
Class Law’s Stephen Alexander, who this year was placed second in Accountancy Age’s Top 50 most influential people list, is also planning action on split capital trusts and the government’s handling of the foot and mouth crisis, both of which will involve accountants.
But he is not planning any Enron-related action.
‘We only look to go after people if there is something to go after,’ he told Accountancy Age.
As far as he is concerned, he does not see any justification of joining the Andersen firing squad in the UK.
And Ernst & Young will be pleased to hear that, as it stands, he does not see any merit in going after the firm for its audit of Equitable, though this was not necessarily for altruistic reasons – ‘Let Equitable sue them, not us,’ Alexander says.
He is, though, actively seeking a settlement between Equitable and GAR holders – discussions are ongoing.
Last week, Alexander and his team had a meeting with law firm Lovells, which is also working with Equitable, and he expected to be able to report back to the members of the class action a proposed settlement.
If an agreement is reached, it is possible this will be added to the claim Equitable is bringing against Ernst & Young.
Who’s helping whom?
- Barlow Lyde & Gilbert is working for Ernst & Young in its defence of the Equitable Life Assurance writs.
- Herbert Smith is acting for Equitable.
- Clifford Chance is working for Deloitte & Touche Singapore in its defence of the Barings claims brought by liquidators KPMG, which has Slaughter & May on its side. The case is due back in the High Court on 7 May.
- Linklaters is working for KPMG over any claims that may be made against it concerning Independent Insurance.
- Class Law is fighting cases for investors and employees at Equitable, Railtrack, Independent Insurance, and Claims Direct. It also has accountants in its sights for claims involving split trust investments, but could end up acting for accountants as it takes on the government over the foot-and-mouth crisis.
HMRC breaches client confidentiality; and partner profits fall at EY. These stories and more discussed in Friday Afternoon Live
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