Overview: equitable revisited

The Joint Disciplinary Scheme’s case against Ernst & Young over its audit of Equitable Life is, as far as we know, in court.

It may be drawing to a close, or it may have just started. All parties in the case are sworn to secrecy.

But though the details of what is currently going on are scant, the near-demise of the insurer has left one of the largest paper trails of any corporate scandal, meaning we know a fair amount about it anyway.

What happened

The story of Equitable’s financial difficulties is well-known.

The difficulty E&Y, its former auditor, faces today is that Chris Dickson, the executive counsel of the JDS, the accounting regulator, has laid complaints against the firm over what he regards as poor auditing.

Kevin McNamara, one of the insurer’s auditors and still an audit partner with E&Y, and Richard Combes, a retired E&Y partner who now sits as a trustee of the Waterways Trust, stand accused of no less than ‘failing to understand [Equitable Life’s] business.’

It is not entirely clear what the issues will be, and the complaint covers audits over ten years. Insiders have confirmed it is one of the largest cases the accounting watchdog has taken on.

One issue, though, that is likely to take centre stage is the one that dominated the firm’s civil case brought by Equitable’s current directors: the allegation that it failed to provision for the guaranteed annuity rate liabilities that eventually helped drain the insurer’s reserves.

E&Y is vigorously defending the claim. Former chairman Nick Land went so far as to tell Accountancy Age in 2005 that ‘we don’t agree there is a prima facie case to answer’.

What's going to happen

What is the worst that could happen? A fine, possibly into seven figures, could result if the complaints are upheld, the case being regarded as one of the more serious the tribunal has had to consider.

The case would damage E&Y’s reputation in financial services, a major business line. McNamara probably has most to lose personally, given Combes retired in 1995. McNamara too is due to retire soon. In any case, both will be hoping the firm can dismiss the complaints with the virtuoso skill it defended Equitable’s own monster lawsuit.