PWC IS TO FACE a legal claim for its audit work of troubled sub-prime lender Cattles.
The claim was lodged today in the High Court of London against PwC for its audit work at Cattles in 2006 and 2007. Accountancy Age understands that a court date could be set for the first half of 2014.
Cattles asserts 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 £850m 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 John 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.
PwC said: “We are disappointed that this claim has been issued given the FSA’s censure of the company for market abuse as well as the FSA’s conclusion that certain directors of Cattles were found to have acted without integrity in discharging their responsibilities.
“This is an inflated and misguided claim and, as we have made clear before, we will vigorously defend our work.”
On the conclusion of its investigation the FSA stated that “Cattles had engaged in market abuse”. It also claimed the finance director at the time, James Corr, was responsible for providing the auditors with all the required information.
“James Corr was therefore the director primarily responsible for Cattles’ financial statements and for ensuring that all relevant information was provided to Cattles’ auditors,” the FSA said.
The FSA found that the FD signed off on two reports; one was given to PwC with some information missing while the Cattles board received a report with all the data.
A source close to the issue told Accountancy Age the FSA’s investigation should not relinquish PwC of all responsibility because PwC had audited the business for more than 20 years and should have realised the error earlier.
Insolvency firm Zolfo Cooper was appointed as supervisor to the scheme of arrangement at Cattles in 2009 which ensures the repayment of a percentage of the debt to creditors over a sustained period of time while the company continues to operate.
A spokesperson for the scheme supervisor said: “After a thorough, independent and objective review of the merits of this claim, it is clear to us that PwC were negligent in their role as auditors. As a consequence, Cattles and its creditors suffered very significant losses. It is therefore in the best interests of the creditors of Cattles that this claim is properly pursued to enable creditors to be appropriately and fairly compensated.”
In July 2009 the accountancy profession’s watchdog the FRC began an investigation into PwC’s audit work of Cattles. The investigation was due to look at the conduct of PwC staff and the audit of accounts for the year ending 2007 and 2008.
The investigation was to look at: the preparation, approval and audit of financial statements for the year ended 31 December 2007; preparation, approval and review of the interim financial statements for the company for the six months ended 30 June 2008; and public statements covering the financial position and performance of Cattles and/or Welcome Financial Services between February 2008 and February 2009.
The FRC said the investigation was ongoing and would not be able to comment at this time.