PwC has settled a long-running negligence battle with sub-prime lender Cattles over accusations that allegedly shoddy auditing of financial statements caused the Yorkshire firm to amass £1.6bn in liabilities.
Just days before the case was due to be heard, both parties agreed to settle.
The roots of the spat go back several years when Cattles accused the Big Four firm of negligence in its auditing of the group.
A claim was formally lodged in February 2013 at the High Court of London against PwC for its audit work at Cattles in 2006 and 2007.
Cattles claimed that PwC negligently audited its 2006 and 2007 financial statements. As a consequence the accounts fundamentally mis-stated the financial position of the company. In particular, the claim states that if impairment provisions had been properly audited it would have revealed the business was not financially viable earlier.
Shares in Cattles were suspended in 2009 pending a report into the company’s 2008 accounts, when accounting errors were discovered revealing an £840m black hole.
PwC refused to sign off Cattles’ 2008 annual report in February 2009 which saw the company’s share price drop 74% to 3.5p. The company eventually entered into a scheme of arrangement in 2009 which is supervised by insolvency practitioners from Zolfo Cooper.
A Financial Services Authority (FSA) investigation, concluded in January 2012, found that the Cattles’ annual report contained “highly misleading arrears, impairment and profit figures”.
The City watchdog banned James Corr and Peter Miller – former finance directors of Cattles and subsidiary Welcome Financial Services respectively – from performing any functions in relation to any FSA regulated activities as a result of publishing misleading information about the credit quality of Welcome’s loan book and acting without integrity in discharging their responsibilities.
Cattles stated that only £900m of Welcome’s approximately £3bn loan book was in arrears, when if accounting standards had been properly applied the correct figure would have been around £1.5bn, the FSA said.
The legal claim contends that PwC failed to competently undertake the audits which meant the group continued to trade for two more years, lending money and incurring liabilities and expenses in excess of £1.6bn throughout that time.
At the time the claim was lodged, PwC said it was “an inflated and misguided claim and, as we have made clear before, we will vigorously defend our work and stressed the lender’s publicly stated accounting policy for bad loans was reasonable.
Cattles admitted in 2009 that it had underestimated the provisions needed to address bad loans and restated its 2007 accounts. It then entered into a financial restructuring scheme in March 2011.
The Accountancy and Actuarial Discipline Board, an enforcement arm of the Financial Reporting Council, is still probing the details surrounding the Cattles saga.
Parties from both sides met at a short court hearing last week to inform Mr Justice Burton on their joint progress.
In a statement, PwC said: “Cattles, Welcome Financial Services and PwC confirm that they have resolved the claims between them. The terms are confidential.”
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The FRC has said that the investigation will 'consider, but not be restricted to, issues regarding misstated accounting balances'