The lessons from Equitable life

The debacle over the audit of Equitable Life by Ernst & Young finally
came to a close at the end of last week when the report of an appeal tribunal
was published.

An earlier tribunal convened by the Joint Disciplinary Scheme had severely
reprimanded Ernst & Young and auditor Kevin McNamara, imposed a £4.2m fine
and awarded costs against them.

On appeal the fine was reduced to £500,000 and costs to £2.4m. The penalty
was also changed to a “reprimand”, removing the “severe” element.

At stake in the appeal was the charge that McNamara and E&Y had
compromised their objectivity and independence in dealing with the Equitable

The appeal document makes for fascinating reading as it weighs the arguments
and sometimes enters into almost philosophical areas to consider the issues.

In the end the appeal tribunal decided there was no evidence of a lack of
independence and objectivity, but the technical issues on which this case rested
will be worth reviewing for any auditor who has been in place for long periods
with the same client.

In fact, what the case presents is cause to stop and reflect on how it is
that an auditor not only maintains but also demonstrates his independence from
the client.

For those who have been with same client for years, they will need to think
about those issues more intensely now in the wake of the Equitable Life ruling,
because it is an area where their work and conduct could be challenged in the
event that disaster strikes
Auditors will need to think about their processes, the relationship with the
client, the personal relationships even record keeping.

Moreover, auditors will need to think about the quality and thoroughness of
their work. It was the failure to conduct a key piece of work in the Equitable
Life audit that led to the allegations about objectivity and independence.

The appeal concluded that faulty work could not be seen as meaning
objectivity has been compromised. Regulators will need to take that conclusion
on board. Auditors will need to think about how these allegations arise, even
when unfounded, and how they ensure such suspicians are headed off even before
they take hold.

And this is critical because without objectivity and independence an audit is
next to worthless. It is the core principle an auditor should abide by and the
element that reassures company owners.

Equitable demonstates why it needs to be maintained and protected.

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