An Appeals Court judge has upheld a High Court ruling that Ernst & Young
was not liable for audit work done at British truck maker ERF.
ERF was sold to MAN in 2000 for nearly £100m, but had been owned by Canada’s
Western Star, which in turn merged into Freightliner.
MAN succesfully sued Freightliner for £350m over the hidden losses at ERF,
with Freightliner attempting to recoup its liability for them from former
But earlier today Lord Justice Chadwick upheld the 2005 high court decision
that found Freightliner liable for frauds carried out at ERF.
In handing down his decision, Chadwick said: ‘To hold that the auditors
assumed responsibility for the use which a dishonest employee of the audited
company might make of the accounts in the context of the parent company’s
negotiations for the sale of the company would, I think, be to impose a
liability greater than they could reasonably thought they were undertaking… it
is impossible to hold that E&Y (rather than Western Star) assumed
responsibility for the use by Mr Ellis, on behalf of Western Star of the
information which E&Y had provided to Western Star.’
Freightliner is understood to have settled its case with Man, paying £250m.
E&Y said they were not surprised by the Court of Appeal’s decision.
Lisa Cameron, general counsel of Ernst & Young said: ‘We have stressed
consistently since the beginning of this action that the case brought by
Freightliner against Ernst & Young was unsustainable because it attempted to
extend the recognised boundaries of an auditor’s duties and responsibilities.’
By the time the fraud – by the former financial controller Stephen Ellis –
was discovered in mid-2001, there was a £100m hole in ERF’s balance sheet.
At the original trial in 2005, Ellis made stark admissions in the original
trial that he had concealed trading losses and deliberately misled E&Y and
made several false journal entries that gave rise to an £18m discrepancy. He
also admitted he had concealed and continued to defraud the company for more
than a year after it had been sold, by which time E&Y was not longer the
Freightliner had vigorously fought the claim, arguing that Western Star was
as much hoodwinked by the frauds at ERF as MAN.
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