Ernst & Young failed to seek independent advice about a crucial court
case which ultimately led to the collapse of their client Equitable Life, a
report into the matter has revealed.
The report by the Joint Disciplinary Scheme (JDS) details how E&Y auditor
Kevin McNamara failed to gain independent legal advice when assessing the
potential impact of a significant legal action against his client, Equitable.
The failure of Equitable inform shareholders about the case would have led to
“defective decision making” according to the JDS
E&Y successfully challenged the tribunal’s assertion its audit lacked
objectivity and independence. The auditor however did not contest some critical
elements of the report including its failure to seek independent advice.
The report claimed that instead of seeking his own advice, McNamara relied
upon “limited reports of that advice” from Equitable according to the report..
Equitable’s loss of the Hyman case proved top be the death knell for the
troubled insurer. The case challenged Equitable’s ability to reduce bonus
payments on its guaranteed pension policies, and forced Equitable to honour its
considerable financial obligations to customers.
Almost £5bn was invested in Equitable Life during 1999 and 1998, when the
report claims the court case, and the potential impact, should have been made
“To have reached the conclusion that the House of Lords’ outcome was remote,
competent auditors would have had to have considered sufficient appropriate
legal advice but instead E&Y saw and heard only Equitable’s limited reports
of that advice and a part of a note of a consultation with leading counsel,” the
“Mr McNamara frankly acknowledged that there were omissions on the part of E
&Y and of himself in relation to the obtaining of legal advice.”
Equitable’s auditor, Ernst & Young was fined £4.2m, reduced on appeal to
£500,000. the body must also pay £2.4 million in costs.
An E&Y spokeswoman said in a statement said the eventual outcome of the
Hyman case thought to be “very unlikely” and, under accounting rules, Equitable
did not have to disclose the potential impact in its statement.
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