Past haunts the Big Five
Audit firms still face massive negligence claims after errors left investors out of pocket
Audit firms still face massive negligence claims after errors left investors out of pocket
Music revivals apart, the boom and bust of the 1980s might be considered a thing of the past. But for accountancy firms auditing companies that left hundreds of UK citizens penniless in their old age and thousands of shareholders out of pocket, their pasts have only just caught up with them.
Some of the most damaging headlines have already been written – Maxwell, Resort Hotels et al – but many are yet to come.
The cost to firms facing negligence claims in audit work has soared and brand damage is incalcuable. For several Big Five firms, the late 1990s and start of the 21st century will be remembered as a time of legal wrangling, closeted talks and apologies.
The world’s largest and most pervasive firm, PricewaterhouseCoopers, created by the merger of Coopers & Lybrand and Price Waterhouse in 1998, has had a rough time.
PwC audits many of the biggest FTSE players and its annual fee income from audit services runs into hundreds of millions in the UK alone.
Only last month PwC and Barclays Capital agreed to pay a multimillion-pound settlement to 250 shareholders of Resort Hotels, which collapsed in 1994 after a serious fraud by its former managing director.
Coopers was the company’s auditor and acted as reporting accountant as Resort raised #20.6m from shareholders in a rights issue based on falsified profit forecasts.
For its involvement, an accountants’ Joint Disciplinary Tribunal fined Coopers Pounds 100,000 in April this year.
At the same time, the tribunal fined former Coopers partner Alun Thomas Pounds 5,000, severely reprimanding the auditor over his failings at Resort.
In a statement, PwC said: ‘We regret that Coopers & Lybrand’s work for this client fell below its usual high standards.’
Then came the Maxwell fallout. Earlier this year a Department of Trade and Industry report slammed the firm for Coopers’ role as auditor. On 2 February 1999 Coopers was fined Pounds 1.2m, censured and ordered to pay Pounds 2.1m costs.
The JDT described ‘serious shortcomings’ and ‘incompetent performance’ in its review, and several individuals were personally censured. Coopers also paid Pounds 67.6m to Maxwell’s creditors including banks and other financial institutions.
The Big Five firm is also grappling with the cost of a High Court case brought against the former auditors, Coopers, by Ernst & Young, liquidators of the collapsed Barings bank. E&Y is suing Coopers and Deloitte & Touche, both former auditors, for Pounds 1bn over claims of negligence. The tribunal will be looking at Coopers’ role in the affair again later this year.
The JDS continues to investigate firms’ audit involvement in many pending cases dating back two decades.
Current JDS cases