PracticeAuditE&Y heads off £350m Freightliner claim

E&Y heads off £350m Freightliner claim

Judge upsholds High Court ruling that E&Y was not liable for audit work on truck maker ERF

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
auditors E&Y.

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
auditor.

Freightliner had vigorously fought the claim, arguing that Western Star was
as much hoodwinked by the frauds at ERF as MAN.

Further reading:

E&Y facing legal challenge from
truckmaker

Truck group wins claim on bad sale

Related Articles

The ‘uncomfortable truth’ behind FRC’s Big Four fines recommendations

Audit The ‘uncomfortable truth’ behind FRC’s Big Four fines recommendations

5d Carl Johnson, Stephensons
BDO holds off Big Four to retain top position as AIM auditor

Audit BDO holds off Big Four to retain top position as AIM auditor

6d Alia Shoaib, Reporter
FRC urged to fine Big Four firms penalties over £10m

Audit FRC urged to fine Big Four firms penalties over £10m

3w Alia Shoaib, Reporter
EY to audit Standard Chartered bank

Audit EY to audit Standard Chartered bank

1m Alia Shoaib, Reporter
KPMG replaces PwC as Croda auditor

Accounting Firms KPMG replaces PwC as Croda auditor

2m Emma Smith, Managing Editor
EY fined £1.8m over Tech Data audit

Accounting Standards EY fined £1.8m over Tech Data audit

2m Emma Smith, Managing Editor
Top 50+50: Firms post significant growth in new tax and audit rankings

Audit Top 50+50: Firms post significant growth in new tax and audit rankings

2m Emma Smith, Managing Editor
FRC closes investigation into PwC over Barclays compliance

Accounting Firms FRC closes investigation into PwC over Barclays compliance

2m Alia Shoaib, Reporter