Past haunts the Big Five

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

• Bank of Credit and Commerce International (BCCI)
  The investigation covers the work of the UK firm of Price Waterhouse. The case was referred to the JDS’ predecessor in March 1992. That investigation was stayed by order of the Court of Appeal in December 1993 until litigation involving Price Waterhouse (the former auditors of BCCI) had ended. The litigation was settled towards the end of 1998 and the case transferred to the JDS. During 1999, the necessary court approvals to the settlement of the litigation were given, and the stay on investigation was lifted.

• Polly Peck International and its subsidiaries
  The investigation covers the work of Stoy Hayward, former group auditors of Polly Peck, and chartered accountants in Erdal & Co, auditors of the subsidiaries in the Near East. Progress was slowed by a High Court judicial review, and a challenge in Northern Cyprus to the executive counsel’s entitlement to examine working papers of Erdal & Co. Complaints have now been laid against Stoy Hayward.

• Barings, certain subsidiaries and former Barings employees
  The case against Coopers & Lybrand, the former auditors of Barings, and two partners has been heard by a tribunal and is now the subject of an appeal. Complaints against Simon Jones, a former Barings employee in Singapore, have been heard and the report of the tribunal is awaited.

• Equitable Life Assurance Society
  The investigation covers Ernst & Young, former auditors of the Equitable Life Assurance Society, as well as a former Equitable director and a former Equitable manager – both are chartered accountants.

• Transtec
  The investigation covers PwC, the former auditors of Transtec, as well as former Transtec directors who are chartered accountants.

• Other investigations
  Arthur Andersen (Wickes), Bird Luckin (Queens Moat Houses) Deloitte & Touche (Capital Corporation and Semple Cochrane) and Nunn Hayward (Versailles Group).