A classic example of corporate blame-laying is currently being played out in London’s High Court. Almost seven years after the collapse of Barings bank – once one of Britain’s most venerable financial institutions – the fundamental question in the world of corporate collapses, whether the auditors or management were to blame, remains unanswered.
At an especially large high court room on Holborn Lane, presiding judge Justice Evans-Lombe and almost 20 be-wigged lawyers and their assistants are surrounded by tens of thousands of files that will feed the case for at least a year.
That is, of course, unless an out-of-court settlement can be reached before the reputation of Barings’ former auditors Coopers & Lybrand, now PricewaterhouseCoopers, and Deloitte & Touche take a severe knock.
Newly-appointed liquidator KPMG is suing PwC and Deloittes for #1bn for negligence in carrying out the group audit and that of the bank’s subsidiary, Barings Futures Singapore.
The case is viewed by many as a test of how far auditors can be held solely responsible for the collapse of a company, and to what extent directors can be exonerated of blame.
On the first day of the trial, on 3 October, Charles Aldous QC, acting for KPMG, told the court that ‘if these basic audit failings had not happened Barings would still be here today’.
He went on to say that the illicit transactions of rogue trader Nick Leeson ‘should not have escaped the eye of even a newly-qualified accountant’.
Both PwC and Deloittes deny the allegations and maintain that the bank’s downfall is due to management failure.
The merchant bank’s collapse back in 1995 brought on by the unauthorised – and, as KPMG’s lawyers claim, little audited – million-pound transactions by rogue trader Nick Leeson is already a well-documented affair.
But, the public should prepare themselves for yet more dirt dishing and finger-pointing in what is likely to be a protracted trial. And then, of course, the appeals could run into 2003.
Although lacking the aesthetic pomp and ceremony of the usual High Court trial – the case is unfolding in a modern court room full of fake wood tables and office chairs to accommodate all the supporting evidence – no amount of expense is being spared. Legal fees have already passed the #100m mark.
Not to mention the amount of time staff at PwC, Deloittes, KPMG and previously Ernst & Young have already dedicated to the case.
Nevertheless, by the time Accountancy Age lands on your doormats what could turn out to be the most expensive and technical case in legal history could have reached a last-ditch out-of-court settlement. But it is as well to remember that that could have happened at any point in the long-running wranglings – but as yet it has not.
And with the past few years’ track record of failed attempts at settlement deals and Deloittes’ insistence at only settling for a nominal sum, it could prove less obtainable than some observers may think.
A look at the past few years’ attempts at settling this highly complicated and emotive case gives an indication of what any settlement is up against.
In November 1998 the City Disputes Panel tried without success to forge a path to settlement. The attempt, however, was thwarted by vulture funds who had become the main creditors.
Since then, Deloittes – which carried out a two-year audit for BFS between 1992 and 1993 worth #10,000 – has resisted all attempts at settlement.
They are after all set to lose the least in the Barings debacle.
But the stakes are growing for both the creditors and PwC.
The firms almost escaped adverse publicity from the trial back in the summer when PwC clinched a ‘settlement in principle’ with the now deposed liquidators E&Y. Unfortunately, the deal was scuppered once again. Rumour has it the vulture funds were not happy with the outcome.
These failed attempts have obviously been brought to the attention of the judge. Following E&Y’s displacement after five years as liquidators, the High Court ruled last month that the creditors, among them Credit Suisse First Boston, must stump up almost #20m in securities costs; just in case the defendants win. If the monies are not available by Christmas the judge will halt the case.
The creditors are bent on raiding the deep pockets of the global accountancy firms. After all, Barings’ management has already received its fair share of lambasting. The Bank of England’s report in 1995 severely criticised the directors.
Andrew Tuckey, Barings’ deputy chairman, was banned by the Department of Trade and Industry from serving as a company director for four years and earlier this year faced a further four-year ban from working as an accountant by the Joint Disciplinary Scheme.
But an auditors’ duty is to ascertain whether a company’s annual report truly reflects their financial status.
In Barings’ case this is the key question. The court heard that Barings’ net profits were overstated by 64% in 1993 and 173% in 1994.
In December 1994, Barings was shown to have a profit of #78m when in reality it was in the red by #174m.
If seen through to the bitter end there will be few winners irrespective of the outcome. Nevertheless if corporations are to retain success, longevity and respect, lessons must be learnt in the wake of the Barings’ disaster.
Whether they are will remains to be seen. The next few months of the economic downturn will prove a testing time for auditors and directors alike.
And hopefully the debate will add to and perhaps speed up new legislation on company law.