ERNST & Young admitted in court yesterday that it had failed to account for potential losses in an audit for its former client, Equitable Life.
The accountancy giant is currently facing a £2.6 billion damages claim from troubled life insurer Equitable Life, which came perilously close to collapse in 2000 after it lost a test case in the House of Lords and was forced to meet financial commitments that it could not afford.
Ernst & Young denies that it failed in its duty as auditor to the life insurer and wants the case to be thrown out of court.
However, in yesterday’s hearing at the High Court in London, Ernst & Young said it should have insisted that Equitable include a provision in the insurer’s 1997-1999 accounts for the possibility of losses from guaranteed annuity rate policies, which were sold in the 1970s and 1980s.
“There was a failure to insist that a provision for possible losses due to the guaranteed annuities be included in accounts,” said Mark Hapgood, the barrister for Ernst & Young.
“But we do not accept the case that insisting on a provision would have caused the directors of Equitable to act differently,” Hapgood told the court.
Equitable Life argues that Ernst & Young failed to warn directors and its members of potential losses from guaranteed annuity policies, which are a form of investment that promises a certain rate of return regardless of underlying investment performance.
Equitable Life, a mutual society, hit the rocks two years ago when a court ordered it to honour guaranteed annuity policies sold in the high-interest rate years of the 1970s and the 1980s.
Until the case, and in its annual report and accounts, Equitable Life insisted that it faced an exposure of only £50 million to the guaranteed annuity problem, although it had provided for £200 million in its balance sheet.
Once it lost the case, the company admitted that the liabilities were in excess of £1.5 billion.
Ernst & Young argued yesterday that the potential loss had been included in reports to regulators and that directors were aware of the threat long before it materialised.
Hapgood said a provision in a set of accounts merely warned of a possible loss and that it would not have told directors anything that they did not already know.
“That the board [of Equitable[ might use accounts to base decisions upon does not mean that Ernst & Young is responsible for those decisions,” the accountant’s barrister said yesterday.