Equitable Life: Former auditors fined and reprimanded
- 4 June 2010
- From the section Business
The former auditors of the Equitable Life, Ernst & Young, have been fined and reprimanded by the accountancy profession's disciplinary body.
E&Y was fined £500,000 with costs of £2.4m for failing to warn Equitable policyholders of the society's problems a decade ago.
Both E&Y and a former partner, Kevin McNamara, were reprimanded.
The decision has only now become public, after an appeal against much more severe punishments two years ago.
Equitable said it noted the punishments.
"We are working with the new government to establish a compensation scheme that is swift, simple, transparent and fair," it said.
In 2008, the accountant's joint disciplinary scheme ruled that E&Y and Mr McNamara had been guilty of more than 20 instances of a "lack of professional competence" when carrying out audits of the Equitable's accounts for the years 1997, 1998 and 1999.
It also found that they had been guilty of "a lack of objectivity and independence", which it said had been "the most serious" of the allegations.
At first E&Y was fined £4.2m with £5.75m costs, while both it and Mr McNamara were reprimanded "severely".
However, after an appeal, the punishments were reduced as the appeal tribunal decided that E&Y and Mr McNamara had not, after all, lacked objectivity or independence.
The accountancy firm welcomed the outcome of the appeal.
"We are nonetheless disappointed by the remaining adverse findings of the joint disciplinary tribunal in relation to aspects of the audit for the financial years 1997-1999," it said.
"Any lessons from our audit of Equitable have long been learned and embedded in our audit systems and procedures.
"The relevant individuals at Ernst & Young have retired from the firm in the last 10 years," it added.
Close to collapse
The Equitable Life closed to new business in 2000 and came close to collapse after failing to put sufficient funds aside to pay for the guaranteed payouts it had promised on some of the pension policies it had been selling from the 1950s until 1988.
The disciplinary scheme found that as auditors of the Equitable's accounts, E&Y should have warned policyholders, in 1998 and 1999, about the dangers of the society losing a High Court Test case that concluded in 2000.
The society had launched this action in 1999, to validate a policy whereby it had been side-stepping promises it had been making to some of its with-profits investors.
The scheme also found that the auditors should have warned that the 1999 accounts did not give a "true and fair view" of the Equitable's finances, because they did not reveal the lack of adequate reserves to meet those promises.
The result was that in 1999 and 2000 a total of £4.7bn was invested by savers in the Equitable's with-profits polices when they might not otherwise have done so.
They consequently suffered big losses from 2000 onwards when the new management of the Equitable brought in to rescue it slashed the value of the savers' polices to help restore the society to financial stability and stop it becoming insolvent.
Only this year have more than a million savers with the society been offered some hope of compensation for their losses.
One of the first decisions of the new coalition government has been to announce that it will follow the recommendation of the Parliamentary Ombudsman two years ago.
It has decided to set up a "fair and transparent" scheme whereby the Treasury will make payments to Equitable savers to compensate them for their "relative" losses.
Details of the scheme have yet to be published but legislation is scheduled for the coming year.